As individuals think about retirement, they often focus on whether or not they will have enough money saved. While having enough money in retirement accounts is a critical question for a low-anxiety retirement, it is not the only thing that people need to consider as they move toward that goal.
People should create a personal checklist for retirement as early as possible to make sure that they are working toward them as they get older. The exact components of a retirement checklist will depend on individual circumstances, but some of the critical things to consider including are:
1. An emergency fund
People are usually aware of the importance of an emergency fund in their pre-retirement years. These funds help cover living expenses should someone lose employment and cover unexpected costs to avoid going into debt. Realistically, most people will head into retirement with an emergency fund already established.
Of course, individuals approaching retirement without an emergency fund at all should seriously consider setting money aside. This is because they will no longer have an income to rely on should something unexpected happen.
Determining the right amount of money to put away involves some guesswork. People need to predict how much they will need for monthly expenses, including housing, health insurance, food, transportation, and more. Plus, individuals may want to put away more than the traditional three to six months’ worth of expenses since they will be living on a fixed income without the ability to replenish the account.
2. Estate planning
People do not like thinking about what will happen when they are no longer around. Failing to plan for this eventuality can create difficult situations for families and affect inheritance significantly.
While people may want to change their estate planning over time, it is important to go into retirement having something in writing. Official documents should be notarized and stored in a safe place. A will is a great start, but individuals need to do more than plan for the allocation of assets.
Thinking about the future also includes assigning power of attorney and appointing a healthcare proxy so that decisions can be made should someone become incapacitated. Furthermore, individuals may want to create a living will that spells out their specific preferences.
Other things to consider include appointing guardians for living dependents and making sure that all retirement accounts, shared assets, and life insurance plans have updated beneficiaries.
3. Debt elimination
It is an unfortunate truth that people often retire with debt even though they would not in an ideal world. Since income becomes fixed in retirement, handling debt payments can quickly become overwhelming. Therefore, individuals should make sure that they have minimized or eliminated their debt prior to retiring.
Even if it is impossible to pay off all debt, it is important to eliminate high-interest accounts as much as possible. Eliminating these debts puts individuals in a much better financial situation for the rest of retirement, assuming that they do not take on more debt.
Paying off debts takes a lot of dedication. Individuals should make a strategic plan for tackling their debt. Often, this involves focusing on one account at a time, starting with the one that carries the highest interest. Once things like credit cards are paid off, vehicle loans will come next.
People should give themselves a small reward each time they pay off a balance to keep themselves motivated. Mortgages tend to have the lowest interest rates and will thus have fairly low priority. Carrying a low-interest debt into retirement is not nearly as big of a deal as retiring with thousands of dollars of credit card debt.
4. Health insurance
Healthcare is one of the biggest expenses that individuals will face in retirement and thinking about needs prior to retiring is crucial. While people will become eligible for Medicare in retirement, these plans do not cover all healthcare costs and still involve paying monthly premiums. Most notably, Medicare does not cover the cost of long-term care, which can become financially crippling for couples who have not prepared to handle it.
Before retiring, individuals need to take the time to figure out exactly what Medicare covers and learn where they may experience gaps in care. Identifying these gaps makes it possible to seek out supplementary plans that can offer the needed coverage without exorbitant fees.
This step may involve securing long-term care insurance, which is typically cheaper when purchased earlier. Of course, a supplemental plan is not always the right choice for everyone. Other options do exist, such as a healthcare savings accounts (HSA), which is a tax-advantaged account designed to cover healthcare costs.
5. Risk tolerance
As individuals get closer to retirement, they need to reconsider the risk profiles of their investments. Most professionals recommend that people get more conservative in terms of investments as they approach retirement so that they can protect their nest egg.
While it may seem tempting to keep your investment risk high and give money the greatest potential to grow, individuals can find themselves losing big and needing to delay their retirement as a result. Typically, individuals should rebalance their portfolios every few months and reduce exposure to equities in the years leading up to retirement.
When getting very close to retirement, people may want to rethink their investment strategies altogether. Sometimes people want to increase the guaranteed income that they will see in retirement. To achieve this goal, people can move their money into government bonds, annuities, dividend income bonds, and similar investments. Higher-risk options also exist for people who want regular income and have enough money to gamble, such as real estate and corporate bonds.