Retirement—it’s a vision many of us hold dear, a time of freedom, fulfillment, and peace of mind. It’s when you can finally enjoy life without the daily grind, pursue your passions, travel the world, or simply relax at home. But to truly embrace these golden years to the fullest, it’s absolutely essential to prepare early and thoroughly, ensuring the decisions you make now will shape your future comfort and security.
While the concept of a financial “waterfall” is incredibly useful for those in the accumulation phase, helping them prioritize their uses for cash, this process breaks down quite a bit as you approach retirement. Your financial life becomes much more complicated than that of a new residency graduate, making a simple, actionable checklist a far more helpful concept for this stage of life. This guide is designed to empower you with practical steps that will take you from nearly retired well into your well-deserved retirement.
As you embark on this journey toward a stress-free retirement, we’re making a few assumptions: that you’ve paid off student loans and consumer debt, that you’ve saved something for retirement, and that you have a budget and a written investing plan. If any of these aren’t quite true, your checklist might be a bit longer, as it will need to include items you should have tackled years ago. This list is presented in an order that makes sense, but remember, you can tackle most of these items in whatever sequence works best for your personal situation. Let’s dive into the first half of your ultimate pre-retirement checklist!
1. **Determine Your “Enough” (Financial Goals)**One of the very first, and arguably most crucial, steps on your path to retirement is figuring out what “enough” means for you. This isn’t just about a magic number; it’s about understanding the financial security you need to fund the retirement lifestyle you envision. A handy rule of thumb, while not a withdrawal strategy, is the 4% rule, which can give you a general idea of how much you need. If you reverse-engineer it, your nest egg should be roughly 25 times your annual spending needs.
To get more precise, you can use a formula that factors in any guaranteed income you anticipate. The formula looks like this: `Needed Nest Egg = (Annual Spending – Guaranteed Income – 75% * Non-Guaranteed Income) * 25`. It’s important to note that if you are including investment property income in this calculation, you should not also include the value of that property in your nest egg to avoid double-counting. Less than guaranteed income, such as from investment properties, should be discounted—a 25% discount is suggested for this type of income.
When thinking about your “annual spending,” consider that a general rule of thumb suggests aiming for 80 percent of your pre-retirement salary to maintain your current lifestyle. However, this guideline doesn’t necessarily account for spending on extras like travel or hobbies, which tend to be higher in the early years of retirement when you’re healthy and eager to go. So, you’ll need to figure out how much money you’ll need to support *your chosen lifestyle* in retirement, factoring in both your essential costs and your desired discretionary spending.
Knowing your total net worth, which includes all your retirement accounts, pensions, Social Security estimates, investments, and real estate, is key here. This clear picture helps determine your retirement timeline, your ideal budget, and what type of lifestyle—or even senior living community—you can comfortably afford. The closer you are to retirement, the more vital it is to thoroughly review your finances and crunch the numbers.
Don’t hesitate to use available resources like retirement income calculators and Social Security calculators. These tools can help you determine if you have enough money saved, gauge when you can start receiving your Social Security benefits, and even assess if you have the means to retire early, should that be a dream of yours. The goal is to set a clear, quantifiable target for your financial freedom.
2. **Tackle Outstanding Debt**Entering retirement debt-free is one of the most powerful moves you can make to ensure financial control and peace of mind during your fixed-income years. High-interest debt, whether from credit cards or personal loans, can quickly erode your hard-earned retirement savings, making your income stretch thinner than it should. The more you can eliminate now, the more resilient your retirement plan will be.
For many pre-retirees, the primary outstanding debt is often a mortgage. Paying off any mortgage, including those on investment properties, adds incredible flexibility to your retirement plan by lowering the ratio of fixed expenses to variable expenses. This not only frees up cash flow but also significantly reduces a major monthly obligation. If paying off a mortgage isn’t at least an option, it may be a sign that you’re not quite ready to voluntarily retire.
Beyond mortgages, it’s crucial to eliminate all other forms of debt. This includes credit card debt, personal loans, and any remaining student or auto loans. Your savings and retirement income will last much longer if you don’t have to make monthly payments toward these liabilities. Take a good hard look at your current liabilities and make a focused effort to clear them before you hand in your notice.
This effort is not just about financial prudence; it’s about establishing a foundation of security. When you no longer have debt payments hanging over your head, your retirement income can go further toward your lifestyle, hobbies, and even unexpected costs, rather than servicing old obligations. It truly gives you more control over your financial destiny when you no longer have those looming payments.
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3. **Build a Robust Emergency Fund**Even with the most meticulous planning, life in retirement can still throw unexpected curveballs. That’s why building and maintaining a robust emergency fund is not just smart—it’s absolutely essential. This dedicated savings account acts as your financial safety net, protecting your carefully constructed retirement plans from unforeseen expenses and preventing you from having to dip into your long-term investments prematurely.
The common recommendation is to have between 6 to 12 months’ worth of living expenses stashed away in a liquid, easily accessible account. This fund isn’t just for a rainy day; it’s for those significant, unbudgeted costs that inevitably arise. Think about potential emergency medical expenses, which can be considerable even with good health insurance. It also covers major home or car repairs that pop up unexpectedly, or even helps absorb rising living costs due to inflation.
Having this cushion is particularly critical if you’re considering early retirement. Without an emergency fund, you might be forced to access funds from traditional IRAs or 401(k)s before age 59 1/2, triggering a painful 10% penalty on withdrawals. This fund empowers you to cover immediate needs without incurring unnecessary taxes or penalties, safeguarding your long-term retirement savings.
Consider the peace of mind that comes with knowing you’re prepared for market fluctuations or unexpected health changes. While living in a community with predictable costs, like Lake Forest Place, can certainly help reduce surprise repair and upkeep costs, an emergency fund provides an overarching layer of security for whatever life might bring. It’s an indispensable part of your pre-retirement financial arsenal.
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4. **Maximize Your Retirement Savings (If Still Working)**Even if retirement is just a few years away, don’t hit the brakes on your savings efforts! These final years can be incredibly impactful for maximizing your nest egg, especially when you factor in catch-up contributions. While the idea of reaching $1 million in savings can feel overwhelming, remember that every additional dollar you contribute now can significantly boost your financial security later.
For those aged 50 and older, the IRS allows for “catch-up” contributions to various retirement accounts. For Traditional and Roth IRAs, you can contribute an extra $1,000 annually beyond the standard limits (for example, $5,500 increasing to $6,000 in 2019, plus the catch-up). Similarly, with 401(k)s, you can contribute both the standard amount (e.g., $18,500 increasing to $19,000 in 2019) and an additional catch-up contribution of up to $6,000. These additional contributions can add up quickly over a few years.
Leveraging these catch-up provisions is a strategic move. Not only do you benefit from the power of compound interest for a few more years, but these contributions can also offer immediate tax advantages, depending on the account type. It’s a fantastic way to give your retirement savings a powerful last-minute boost before your earned income ceases.
In these final years, it’s also a good time to do a quick check-up on your investments. Is your portfolio diverse enough? Are you paying a ton in fees? Ensuring your investments are optimized for growth and cost-efficiency will help these last-minute contributions work even harder for you. Keep adding to your retirement savings and take full advantage of every opportunity available.
5. **Understand and Strategize Social Security Benefits**For many retirees, deciding when to draw Social Security is arguably the single most important financial decision they’ll make. It’s a cornerstone of retirement income, with a significant portion of older beneficiaries relying on it for at least half, and sometimes 90% or more, of their income. Understanding how your benefits are calculated and strategizing when to claim them can have a profound impact on your financial well-being in retirement.
The age you choose to claim directly affects your monthly benefit amount. You can start receiving benefits as early as age 62, but doing so results in a permanent reduction. Waiting until your full retirement age (FRA), which is between 66 and 67 depending on your birth year, gets you 100 percent of your benefit. The real kicker is if you delay beyond your FRA: your benefit continues to grow each month until age 70, offering a substantial boost to your monthly payments.
In most situations, whether you are married, single, widowed, or divorced, it typically pays off significantly to wait if you can afford to. The increased monthly payments from delaying can provide a valuable, inflation-adjusted income stream for the rest of your life. It’s such a critical decision that it’s worth diving into resources like Mike Piper’s excellent “Social Security Made Simple” for a comprehensive understanding.
If you plan to keep working before your Full Retirement Age (FRA), be aware of the annual earnings test. Social Security will withhold $1 for every $2 you earn above a certain limit (e.g., $23,400 in 2025). In the year you reach FRA, the limit is higher (e.g., $62,160 in 2025), and the deduction is less severe ($1 withheld for every $3 earned). Crucially, after you reach your FRA, there’s no limit on earnings, and your benefits are no longer subject to withholding.
To get a clear idea of where you stand, sign up for a free Social Security report. This personalized statement will detail your estimated benefits at different claiming ages, allowing you to make an informed decision that aligns with your financial needs and longevity expectations. Taking the time to strategize this now can profoundly improve your retirement income.
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6. **Evaluate Pension and Non-Governmental 457(b) Options**Beyond Social Security, many pre-retirees have other valuable income sources to consider, primarily pensions and 457(b) plans. If you are eligible for a pension, you’ll likely face several important choices regarding its distribution. These options can include taking a lump sum payment, receiving monthly payments until you die, or opting for monthly payments that continue until both you and your spouse pass away. Each choice has significant financial implications, so careful evaluation is essential.
Pension decisions often depend on your overall financial picture, your health, your spouse’s health, and your need for predictable income versus control over a lump sum. A lump sum offers immediate control, allowing you to invest the money as you see fit, but it also means taking on investment risk. Monthly payments, on the other hand, provide a guaranteed income stream, reducing longevity risk but offering less flexibility. You’ll need to thoroughly review these options and choose what aligns best with your retirement strategy.
Similarly, if you have a non-governmental 457(b) plan, understanding its unique characteristics is vital. Unlike governmental 457(b)s, which can typically be transferred into IRAs, non-governmental 457(b)s cannot. This means you will need to choose from the specific distribution options made available to you by your plan administrator. As a general rule, money held in a non-governmental 457(b) is often recommended to be spent relatively early in retirement, given these limitations.
It’s crucial to differentiate these plans. Governmental 457(b)s offer more flexibility, often allowing consolidation into an IRA, which can minimize costs, decrease hassle, and maximize investment choices. However, for non-governmental plans, you’re locked into their specific distribution rules. By understanding these nuances, you can integrate these income sources effectively into your broader retirement income plan and avoid any unwelcome surprises.
7. **Explore Annuities (SPIAs & DIAs)**For those looking to bolster their guaranteed income streams or gain an extra layer of financial security, annuities can be a powerful tool to explore. A Single Premium Immediate Annuity (SPIA) is essentially like buying a pension from an insurance company. You pay a lump sum upfront, and in return, you receive a guaranteed stream of income payments that start immediately and continue for a specified period or for the rest of your life.
While not considered as good a deal as delaying Social Security to maximize its benefits, SPIAs still have a valuable place in a retirement plan, particularly for individuals who don’t quite have “enough” in their nest egg as they move into retirement. They transform a portion of your savings into a predictable income stream, reducing the worry about market fluctuations or outliving your money. This can be a significant psychological relief, providing a concrete financial backstop.
Another fascinating option is a Delayed Income Annuity (DIA), often referred to as “longevity insurance.” Like a SPIA, it’s a fixed-income annuity, but with a key difference: payments don’t start immediately. Instead, your payments may not begin for a decade or even more into your retirement. The compelling benefit here is that, because the insurance company holds your money for longer, the eventual payments are dramatically higher—but only if you live long enough to receive them.
Like other insurance products, such as SPIAs or even permanent life insurance, DIAs can give you significant psychological “permission to spend” your main nest egg. Knowing that you have a guaranteed income stream kicking in later in life provides comfort that you won’t be in a difficult financial situation during very late retirement. It’s a strategic way to manage longevity risk, ensuring you have something backing you up for the long haul.
Now that you’ve laid the critical financial foundation, it’s time to refine your strategies and make those smart moves that truly optimize your golden years. This next set of steps focuses on solidifying your income streams, managing potential healthcare complexities, making informed lifestyle choices, and ensuring your legacy is protected. These actions empower you to navigate retirement with confidence, ensuring a fulfilling and secure future.
8. **Decide on Withdrawal Strategy**After meticulously planning your income sources, your nest egg remains a crucial component of your retirement funding. The key now is to decide how you’ll draw from it to sustain your lifestyle. This isn’t a one-size-fits-all solution, but rather a dynamic approach that adapts to your unique situation and market conditions.
Most experts suggest a variable withdrawal strategy, often starting around 4% of your nest egg and adjusting as you go. This method provides flexibility, allowing you to increase or decrease withdrawals based on market performance and your spending needs. It’s a pragmatic way to ensure your funds last throughout your retirement journey without unnecessarily depleting them too quickly.
Having a clear, adaptable strategy for withdrawing funds from your various accounts, including 401(k)s and IRAs, is vital. Each account type has its own set of rules and tax implications, so understanding these nuances will help you make tax-efficient choices. This intentional planning ensures your hard-earned savings work optimally to support your retirement dreams.
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9. **Consider Long Term Care Insurance (LTCI)**Even the most robust retirement plans can be significantly impacted by the unexpected costs of long-term care. While many people believe Medicare will cover these expenses, it often does not fully cover extended nursing home stays or in-home assistance. It’s a vital area where a proactive approach can save you and your loved ones considerable financial strain.
For individuals with moderate assets, typically ranging from $300,000 to $2 million, Long Term Care Insurance (LTCI) deserves serious consideration. It acts as a protective shield, covering costs for nursing homes, assisted living, or in-home care services, thereby preserving your primary nest egg. This is particularly relevant for married couples, as it helps protect assets for the healthy spouse.
However, the decision to purchase LTCI isn’t universal. Single individuals or those with limited assets might consider “spending down” until they qualify for Medicaid. Conversely, very wealthy individuals may find it more cost-effective to self-insure, covering potential long-term care costs directly from their substantial assets. If five years in a nursing home costs less than a quarter of your nest egg, self-insuring might be a viable option, but it’s crucial to run your own numbers.
Remember, if you or your spouse are in a nursing home or receiving care at home, your discretionary spending on activities like travel will likely decrease. This provides some offset to the long-term care expense. Planning for this possibility, whether through insurance or self-funding, is an indispensable part of creating a truly secure and comprehensive retirement plan.
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10. **Pay Off Mortgages**Entering retirement with as few fixed expenses as possible grants you incredible financial freedom and flexibility. Among the most significant fixed expenses for many, even after paying off other consumer debts, is the mortgage on their home or investment properties. Eliminating this monthly payment can dramatically transform your retirement cash flow.
Paying off your primary residence mortgage is a powerful move, freeing up a substantial portion of your monthly budget that can then be allocated to lifestyle, travel, or unexpected costs. This significantly lowers your fixed-expense-to-variable-expense ratio, making your retirement income more resilient and less susceptible to economic fluctuations.
Similarly, extinguishing mortgages on any investment properties you own can vastly improve their cash flow, making them more profitable and less of a management burden. If paying off your mortgage doesn’t even seem like a feasible option, it might be a practical indicator that you’re not quite ready for a voluntary retirement. Taking action on this now creates a much stronger financial position for your golden years.
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11. **Upgrade Autos and Buy Toys**Before you officially transition into retirement, take a moment to assess your major assets and discretionary purchases. Many financial experts suggest that it’s a smart move to make significant purchases, like upgrading your automobile, boat, or even acquiring new recreational vehicles, while you’re still actively employed and earning a higher income. This strategy is about preemptively managing future expenses.
The primary benefit of buying these items before retirement is to avoid unexpected large purchase or maintenance costs hitting your fixed income years. By taking care of these capital expenditures now, you ensure that your early retirement years, often referred to as the “go-go years” when you’re most active, are not immediately burdened by substantial outlays for vehicles or leisure items.
It’s also highly advisable to pay cash for these big-ticket items whenever possible. By doing so, you prevent them from becoming liabilities that require monthly payments, which can strain your retirement budget. Instead, these items remain assets that you could sell if an unforeseen financial situation arises, providing an additional layer of security to your retirement plan.
12. **Consider Downsizing**For many, finding “enough” for retirement involves more than just accumulating savings; it also means strategically managing expenses. One of the most impactful ways to bolster your retirement nest egg and reduce ongoing costs is to consider downsizing your home. This move can unlock significant capital and streamline your living expenses.
Moving into a smaller or less expensive house, either in your current area or a more affordable region, can free up a considerable amount of equity. This difference between the value of your current home and your future home can be directly added to your retirement savings, giving your nest egg a substantial boost. In some cases, it might even mean exploring a move to a more affordable country for extreme savings.
The benefits of downsizing extend beyond a one-time cash infusion. A smaller home typically translates to lower maintenance and repair costs, reduced property taxes and utilities, and often lower insurance premiums. This simplification of household expenses contributes to a more predictable and manageable retirement budget, reducing financial stress and freeing up resources for other pursuits.
Choosing a community like Lake Forest Place offers an excellent example of how downsizing can enhance retirement. Their cottages provide a “rightsized” lifestyle, combining the comforts of home with access to community amenities and services, all while reducing the burden of homeownership. This kind of thoughtful adjustment can significantly contribute to your long-term financial freedom and peace of mind.
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13. **Review Estate Plan**Your estate plan is more than just a set of documents; it’s a reflection of your wishes for your legacy and the protection of your loved ones. As you approach and enter retirement, it becomes increasingly critical to review and update this plan, ensuring it aligns with your current life circumstances and financial goals. What worked when your children were young likely needs significant revisions now.
Take the time to examine your will, financial and healthcare powers of attorney, beneficiary designations, living will, and the titling of your assets. The focus often shifts from designating guardians for minor children to determining how your money and possessions will be distributed after your passing. If you have been fortunate enough to accumulate substantial wealth, proactively addressing potential estate tax issues with your advisor becomes a priority.
Remember, your estate plan should evolve with you. Any major life events—such as marriage, divorce, births of grandchildren, or changes in relationships—should trigger a review. An updated estate plan ensures your wishes are honored, minimizes potential family conflicts, and protects your loved ones from unnecessary legal and financial burdens during an already difficult time.
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14. **Establish a Revocable Trust**For many individuals, especially those with significant assets or a desire for streamlined asset transfer, establishing a revocable (living) trust is a highly recommended step before or early in retirement. This legal arrangement holds your assets and allows them to be distributed to your beneficiaries outside of the probate process, which can be time-consuming, public, and expensive.
A revocable trust offers flexibility, as you can change or revoke it at any time while you are alive and mentally competent. It’s often used in conjunction with a “pour-over” will, which directs any assets not already in the trust to be added to it upon your death. This comprehensive approach ensures that all your assets are managed and distributed according to your wishes, privately and efficiently.
The primary benefit of a revocable trust is avoiding probate court, which can tie up your assets for months or even years. This allows for a much quicker and smoother transfer of wealth to your heirs, reducing stress and legal fees for your family during a period of mourning. It’s a proactive measure that provides peace of mind, knowing your loved ones will be taken care of promptly and privately.
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Embarking on retirement is a momentous journey, a new chapter brimming with possibilities. The steps outlined in this comprehensive checklist are designed not just to prepare you financially, but to empower you with the confidence and clarity needed to truly savor these golden years. By addressing these practical considerations now, from optimizing your income streams to securing your legacy, you’re building a robust foundation for a future filled with freedom, purpose, and peace of mind. It’s about setting yourself up to thrive, ensuring every day in retirement is lived to its fullest potential, free from avoidable financial worries.
