Retirement preparation is, behind accumulating wealth, the most important financial step we will take in our lifetime. Let’s talk about what you should do to prepare for your own retirement and when you shout start that journey. I’ll take it step-by-step and describe each of the moves that you should make.
1. Identify a retirement date.
You should have a general goal in mind for your retirement date. That should probably start to take shape somewhere in your late 40’s to late 50’s, depending on your health and willingness to work into your later age. This date doesn’t have to be fixed, but it should be pretty close. All the rest of the steps will be based on this goal date.
2. Make a budget.
If you don’t have one, you should put a relatively rough monthly budget together. It doesn’t have to be perfect, but it should be relatively close and if you’re in doubt of some of your expenses, round up. It’s always better to be pessimistic and wind up spending less than it is to spend way over what you estimate.
3. Get an idea of your debt picture, if you have any.
How much do you owe on anything? What is the payment? When will it be eliminated? If you can’t eliminate your debt before retirement then you’d better have a good plan to afford the payments.
4. Get your social security/pension statements.
How much income will be provided by sources you don’t have to specifically save for? Social Security is a fantastic base to build retirement income from and should be included in your potential retirement income.
5. Will you work in retirement?
Many of us will continue to work into our retirement, because we like our jobs or we would like to have a regular purpose for our day. Employment income, even if it’s not a whole lot, can be a very important thing as long as you’re healthy enough to work. Think about if you’d like to simply change jobs, do your job but go part-time, or just quit work all together.
6. Add up your assets that will provide you income in retirement.
Do you have rental homes? Do you rent farmland? What does your investment portfolio look like?
7. Speaking of investments, it’s time to start playing defense.
You’ve spent decades building up your retirement nest egg. Now is not the time to leave it up to unnecessary risk. Starting about 7 to 10 years before your anticipated retirement date, you should begin the process of removing some of the riskier parts of your investments and start looking for places that are safer for your wealth. You’re going to need to start using some of this money soon, and you cannot afford a major stock market crash. It’s time to get boring.
Remember, retirement is about one thing: cash flow. It’s all about generating enough income to sustain whatever standard of living you choose for the rest of your life. Your assets have to pump out income that you simply cannot outlive. If you go through the first six steps above and won’t have enough income to support you, then you’ll have to make adjustments. You can retire later. You can attack debt more aggressively. You can save more. You can spend less.
Be realistic. Understanding your ability to retire by a certain age isn’t as complicated as you think. Visit with your financial planner to help. We do this for a living. If you’re within 10 years of retirement, you should start that process now.