Key Takeaways
- The decisions you make in the 10 years leading up to retirement can have a significant impact on your long-term financial security.
- During this period, it is important to implement strategies that align with your values, priorities and retirement goals.
- Your financial advisor can help you make informed decisions to help optimize your retirement outcomes.
The decade leading up to retirement is one of the most critical periods in your financial life. During these years, the decisions you make can have an outsized impact on your long-term financial security and ability to achieve your retirement lifestyle goals. It is important that your decisions in these crucial years align with your retirement vision, values and priorities. The following tips can help you plan intentionally during the years leading up to retirement.
Understand Where You Stand
The first step is to gain perspective on your current financial situation. Take inventory of your assets, liabilities, expenses and sources of income. Track the value of employer-sponsored retirement accounts, IRAs, taxable accounts, real estate, equity compensation, pensions, deferred compensation, etc. Compare these assets to what you owe on mortgages, student loans and credit cards (as well as other types of debt).
On a regular basis, update this inventory to maintain an ongoing understanding of your financial situation as it evolves over time.
Maximize Retirement Savings Opportunities
The years leading up to retirement offer a valuable opportunity to set aside additional savings. At age 50, taxpayers are eligible to make catch-up contributions to qualified retirement plans and IRAs. This opportunity exists to support those nearing retirement who still need to close a savings gap. If your cash flow allows, it is wise to view maxing out your retirement plan contributions and catch-up contributions as non-negotiable.
Beyond your retirement plan contributions, consider whether you should be saving additional assets in a taxable brokerage account or Roth IRA. Maintaining an after-tax source of retirement savings can provide you with additional tax planning flexibility once you begin taking withdrawals in retirement. The right mix of pre-tax versus after tax savings depends on your current tax bracket, expected retirement tax bracket and other sources of income. Your financial advisor can help you determine an appropriate savings strategy for your particular situation.
Pay Off Debt
Carrying debt into retirement can negatively impact both your cash flow and your peace of mind. In the years leading up to retirement, prioritize paying off high-interest debt. It may also make sense to pay off any existing mortgage balance, but only if you can do so while continuing to save for retirement.
Paying down your debt allows you to enter retirement with manageable fixed costs and provides the freedom to adjust your monthly spending when unexpected challenges arise.
Take Steps to Reduce Sequence-of-Returns Risk
Sequence-of-returns risk refers to the risk that market volatility in early retirement could cause irreparable damage to your portfolio’s longevity. A sharp decline in the value of your investments as you are making withdrawals could mean that your portfolio is unable to recover.
In the years leading up to retirement, it is wise to begin building a short-term account to fund the first three to five years of retirement lifestyle expenses. Doing so gives you the flexibility to cover your monthly income needs without being forced to sell investments during a market downturn.
Plan for Healthcare Costs
Healthcare is one of the largest and least predictable expenses faced by many retirees, which is why it is important to plan in advance. One of the most tax-efficient ways to save for retirement healthcare expenses is by contributing to a health savings account (HSA) during your working years. HSAs are available to those who participate in a high-deductible health insurance plan (HDHP) and offer three distinct tax benefits:
- Because contributions are made with pre-tax dollars, they reduce your taxable income.
- HSA funds grow tax-free in the account.
- When used to pay for eligible medical expenses, HSA withdrawals are tax-free.
In addition, HSA contributions made via payroll deduction are not subject to Social Security and Medicare taxes and, unlike with 401(k) contributions, there are no required minimum distributions from these accounts. Also, because HSAs allow for investments in mutual funds (once certain asset levels are achieved), assets invested have the potential to grow over time and enhance your overall retirement savings.
In addition to contributing to an HSA, take time to review your Medicare options and make a plan for coverage. Also consider whether it makes sense to purchase a long-term care insurance policy while you are still healthy enough to qualify for favorable rates.
Take Advantage of Tax Planning Opportunities
The years leading up to retirement present unique tax planning opportunities. Work with your financial advisor to determine whether the following tax strategies make sense for you:
- Roth conversion
- Tax-diversified retirement savings
- Donor-advised fund (DAF) and charitable bunching strategies
- Strategic business sale timing
- Net unrealized appreciation (NUA)
- Qualified charitable distributions (QCDs)
Stress Test Various Retirement Scenarios
The most effective retirement plans are built to be resilient under multiple scenarios. Your financial advisor can help you stress test how your plan is likely to hold up under various conditions, such as lower market returns, high inflation, a long lifespan, unexpected healthcare costs, changes in tax law and more.
Conclusion
Remember that the years leading up to retirement are not simply a countdown to life’s next chapter. They are a period of active preparation during which small, strategic actions have the potential to compound into lasting financial security. Intentionally planning during this critical period can help you enter retirement with greater confidence.
If you could use some help planning for a more secure retirement, we would love to have a conversation. Please schedule a call to get started.
