The Key Steps to Take in the Final Few Years Leading up to Retirement

The Key Steps to Take in the Final Few Years Leading up to Retirement

Preparing for retirement can prove extremely stressful and only becomes more so as you approach the age of 65, even if you do not plan to retire. Retirement often lasts for decades, and maintaining financial solvency for this amount of time requires a great deal of planning. Many people often understand the steps they need to take when they are younger, such as setting up a 401(k) and other retirement accounts. However, determining the right moves to make in the final few years leading up to retirement may not be as clear. During these years, you will continue to work, but you should also start to think about what your retirement budget will look like. At this point, you will likely understand what your nest egg is and how much you can safely spend in retirement, and a lot of the preparation will be involved in refining your budget.

Determining How Much You Need During Retirement

In the years leading up to retirement, one of the most critical things you need to do is to assess the income and expenses that you expect to have once you stop working. You need to think about your fixed expenses, Social Security, investment income, pension, any extra income from a part-time job, and the balances in all of your retirement accounts. Doing the math will help you to learn what to expect in terms of guaranteed monthly income and the amount that you can safely withdraw from your accounts in order to make ends meet. In addition, you should consider any debt you still owe and when it will be paid in full, as this will increase monthly spending only for a set period of time. Plus, you may have other upcoming major expenses, which could include a college education for a child or grandchild, or paying for a wedding.

The other side of the coin involves figuring out how much you will likely spend once you retire. While you likely have mock budgets from when you were creating savings goals, you can create a much more realistic budget by looking at your current spending. Once you retire, your expenses will likely not change much unless you plan on making a drastic life change, such as moving to a new home or city. Taking into account what you spend now can also help you to identify areas where you may need to reduce your spending once you retire. If your monthly budget is more than you will have access to once you retire, you will need to figure out ways to tame your budget. Some of these changes may come naturally. For example, you will likely spend less money on transportation without the need to commute every day. At the same time, you may spend more on travel, so it is important to consider expenses from both sides.

How to Keep Close Track of Your Pre-Retirement Spending

To fine tune your budget for retirement, you will need to closely track your spending. You can do this in a variety of different ways. Kiplinger, Mint, and Microsoft Office have templates you can use for tracking household spending. However, inputting this data can take a significant amount of time. Fortunately, many online tools and apps exist that will enable you to automatically keep track of your spending. Mint is a great option, as it allows you to link all of your financial accounts to one app. However, you will still need to take the time to add these accounts and sort through the expenses that are not automatically recognized. You can create specific categories to make it easier to see exactly where you spend money without the need to manually go through each transaction.

Of course, you may not feel comfortable putting your personal information into an app. If that’s the case, you may want to start using a single credit card for your expenses provided that you have enough discipline to pay it off each month. By doing so, you can go through the card yourself to categorize your spending. Moreover, many cards automatically categorize what you spend and allow you to see the breakdown on a dashboard. The added bonus of this approach is that that you can build up some rewards along the way depending on which credit card you use. This strategy is also compatible with using an app like Mint. If you do not feel comfortable using a credit card, you can find a debit card that will also categorize spending for you or perhaps even open different accounts. One approach is to pay off fixed expenses with one account and have another for long-term savings. A third account can receive the overflow. Once the overflow account starts to run low, you will know that you are close to hitting your budget.

The Benefits of Tracking You Spending Prior to Retirement

The real benefit of tracking your monthly spending is that you will start to pay attention to where your money goes and begin to categorize expenses according to your needs and wants. While housing, utilities, and transportation are basic needs, entertainment and travel are wants. However, the lines can become blurred. For example, you may be living in a home with several bedrooms that you no longer use. While your mortgage is a need, it could be reduced by downsizing to something more affordable and potentially eliminating that debt altogether. As you track your spending, you need to figure out what you can spare in retirement and what is necessary for you to feel like you are living a fulfilling life. Doing so will provide you with a better sense of how to prepare for retirement. You may decide to work a few extra years in order to save additional money, which is another benefit of budget tracking.