How to Build a Retirement Income Plan if You're 5 Years Away
So you're about five years away from retiring. It makes a lot of sense to start assembling a list of things to do before your last day at your job. Doing so might make the difference between having a comfortable retirement and one full of stress.
Here, then, are some pre-retirement moves to consider.
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1. Have a plan and see where you are
First things first. You need a comprehensive retirement plan . This involves figuring out how much income you'll need in retirement and how you'll get it. It can help to track your expenses carefully over a few months or a year, and then to use that to estimate your future income needs. Be sure to keep inflation and healthcare costs in mind as you plan, too.
2. Aim to set up multiple income streams
It's smart to set up multiple income streams for your retirement years. That way, if one ends up disappointing you -- for example, Social Security's future is threatened -- the other(s) can still be there. Here's one way these streams could look:
| Income source |
Annual income |
|---|---|
| Social Security |
$30,000 |
| Dividends from stocks |
$20,000 |
| IRAs and 401(k)s |
$10,000 |
| Fixed annuity |
$20,000 |
| TOTAL |
$80,000 |
Your income streams could be very different, of course, in size and type. They may include a pension, rental property income, royalties, bond interest, and so on. Amassing a bunch of dividend-paying stocks in your portfolio can be quite effective. If your portfolio of, say, $500,000 has an overall dividend yield of, say, 4%, that should kick out around $20,000 annually -- and that sum will likely grow over time, too.
3. Get out of debt
If possible, aim to enter retirement with minimal to no debt. That can help you sleep at night, if you're not facing hefty monthly mortgage payments or car payments.
4. Have a healthcare plan
As you approach the age of 65, start researching Medicare, because you're going to have to enroll in it, choosing between "original" Medicare, which features Part A (hospital coverage) and Part B (physician/medical insurance), or a Medicare Advantage plan, sometimes referred to as Part C.
If you're younger than 65 and still planning to retire, look into how you can best get health insurance. Your state's Affordable Care Act exchange may be your best bet.
5. Be as healthy as you can
Our health often gets worse as we age, with many people developing diseases and requiring more care. It's a smart move to get healthy or stay healthy as you approach retirement, because this can keep your health expenses on the low side, and it can also permit you to enjoy more activities in retirement, such as travel, sports, and other recreational endeavors. So aim to exercise and eat nutritious meals.
6. Plan for Social Security
Learn more about Social Security, and think carefully about the issue of when to claim Social Security. You can start collecting Social Security as soon as age 62, or delay up to age 70, to make your benefits bigger. Most, but not all, people will get the most out of Social Security by delaying until age 70, if they can. If you're married, coordinate a strategy with your spouse.
7. Fill your Health Savings Account
If you have a Health Savings Account (HSA), consider filling it as much as you can before you retire. Unlike other accounts, it's not use-it-or-lose-it; it essentially becomes a retirement account, and the money in the account can be invested so it grows. When that money grows, you won't pay taxes on those earnings, and if you take money out for qualified healthcare expenses (which you'll likely need to do in retirement), you won't pay taxes on it then, either. You'll be able to use the money for non-healthcare expenses, too, though such withdrawals will then be considered taxable income.
8. Try a test drive for retirement
If you've now got a retirement plan and you think you know how much income you'll need in retirement, try living off that sum right now -- for a year, if you can. This can help you see if it's enough money or if you need to save more.
Try thinking through your retirement, and not just in financial terms. Think about how you'll spend your days. What hobbies will you enjoy? How will you socialize, now that you won't have colleagues at work? Imagine some unwelcome developments, too -- how will you deal with a sudden major expense, such as a costly home repair? What if the stock market crashes?
9. Consider downsizing or relocating
Perhaps consider downsizing or relocating in retirement . It's not best for everyone, but it can be a powerful strategy if you haven't saved nearly enough for retirement. If your current home is much more expensive than a home in some other region you might move to, you could net a fat profit by moving and use that money to bolster your nest egg. Simply downsizing to a smaller home in the same area can be effective, too.
10. Consider delaying retirement
This idea may not be welcome, but it can be extremely powerful. If you push back your retirement date by a few years, you'll be able to save a lot more money, and your portfolio of investments will have more time to grow. Also, your nest egg will have to support you for fewer years. And delaying retirement can let delay claiming Social Security, which will boost your benefits.
Consider all these moves. If you can act on a few or many of them, you might greatly enhance your future financial security.
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How to Build a Retirement Income Plan if You're 5 Years Away was originally published by The Motley Fool
