Retiring in three years or less can feel like a dream come true, but it’s also a serious financial transition. If you’re staring at the countdown and getting closer to the day you leave your job, it’s vital to make the right moves now. The decisions you make in these final years of work can determine your lifestyle for decades.
Here are five crucial things to do with your money ASAP to ensure you’re financially ready for retirement. The clock is ticking, and each step matters.
1. Explore Your Health Insurance Options
Health insurance is one of the biggest concerns for retirees. Fidelity estimates that the average 65-year-old needs around $165,000 in after-tax savings to cover healthcare expenses throughout retirement. Yet, many people mistakenly believe that Medicare will take care of all their needs, which is far from the truth. Here’s what you need to know:
- Medicare coverage kicks in at age 65, but it doesn’t cover everything.
- You’ll likely need Medigap or Medicare Advantage plans to reduce out-of-pocket expenses.
- If you retire before 65, you need to find a health insurance plan. COBRA allows you to keep your employer’s insurance for up to 18 months, but you’ll be responsible for the entire premium, making it a costly option.
- Alternatively, consider individual plans through the Obamacare marketplace, though the coverage can be more limited than what you’d get from an employer.
Make sure you’re aware of all the costs, the coverage gaps, and where the funds will come from to pay for these plans. You don’t want to retire and realise your health insurance costs are draining your savings.
2. Get Your Cash Flow Right
Managing your money effectively is critical as you transition into retirement. You need to get your cash flow in order—meaning balancing your income and expenses. Financial experts recommend you’ll need approximately 80% of your pre-retirement income annually to maintain your current lifestyle.
How to ensure you have the right cash flow:
- Understand your sources of income—whether that’s Social Security, a pension, or money from savings.
- Aim for a retirement strategy that will ensure your income sources can cover your essential expenses without running out.
- A popular strategy to avoid running out of money is the 4% rule. This suggests that if you withdraw 4% of your portfolio each year (adjusted for inflation), your savings should last for about 30 years.
You’ve worked hard to build your savings—now, ensure it works for you during retirement. A little planning can go a long way in helping you maintain a comfortable lifestyle.
3. Maximize Retirement Account Contributions
If you’re less than three years away from retirement, it’s time to supercharge your retirement savings. The final years of work are your opportunity to make the most of catch-up contributions to retirement accounts like your 401(k) or IRA.
- 401(k) catch-up contributions allow you to contribute up to $7,500 more per year once you’re over 50, helping you beef up your retirement fund quickly.
- IRAs also offer catch-up contributions, allowing an additional $1,000 if you’re over 50.
But saving is only part of the story. You also need to make sure your asset allocation is in line with your upcoming retirement. You can’t afford to be overly aggressive with your investments when you’ll soon need to access that money. A rule of thumb is to subtract your age from 110, and that should be the percentage of your portfolio in stocks. The rest can be in bonds or other safer investments.
4. Decide When to Take Social Security
Your Social Security benefits are likely to become a significant income source when you retire, but deciding when to claim them is crucial. You can begin claiming at age 62, but your benefits will be reduced by as much as 30%. If you wait until your Full Retirement Age (FRA), which for most people born in 1960 or later is 67, you’ll receive your full benefit.
But there’s a strategy that can pay off: delaying your benefits until age 70. For every year you delay after FRA, you’ll receive 8% more in benefits, which can really add up over time.
Here’s a quick breakdown:
- Claim early (62): 30% reduction in benefits.
- Claim at FRA (67): Full benefits.
- Claim later (up to 70): Up to 24% higher benefits than at FRA.
This may not be the right move for everyone, depending on your health, life expectancy, and need for income, so consider the implications carefully.
5. Pay Off High-Interest Debt
One of the best ways to ensure a stress-free retirement is to eliminate any high-interest debt. Carrying debt—especially credit card debt, which can have interest rates up to 21.76%—will only get harder to manage on a fixed income.
Here’s why paying off debt is crucial:
- With no regular paycheck, you’ll have less flexibility to manage monthly debt payments.
- The interest on high-interest debt can drain your savings over time.
- Entering retirement without debt gives you peace of mind and ensures your money can be spent on the things that truly matter, rather than paying off creditors.
Focus on paying off high-interest debt before retirement, and you’ll be setting yourself up for a smoother financial transition.
Conclusion: The Time to Act is Now
Retirement is within reach, but there are several important steps to take to ensure you’re in the best financial position possible. From getting your health insurance squared away to deciding when to claim Social Security and paying off high-interest debt, the next few years are crucial.
By maximizing your retirement savings, managing your cash flow, and making the right choices now, you’ll be able to retire with confidence and enjoy the freedom that comes with it.
