Congratulations! After 30-plus years of working and socking away savings, you can finally see retirement on the horizon. But it’s not time to coast just yet.
The actions you take in the final decade before you quit working are crucial to getting the next phase off to a smooth start.
“This is the time to evaluate your progress, make adjustments, and take steps to make your retirement a success,” says Jeff Townsend, a Westminster, Colo., wealth manager and the author of “The Road to Retirement.”
In Money magazine’s Retirement Guide 2013, you’ll find smart strategies to guide you through the last stretch, starting at 10 years out, then five years, one year, and, finally, your first year of leisure.
From claiming Social Security to managing health care costs to deciding on a place to live, you’ll come away knowing exactly what you need to do to shore up your plan.
10 YEARS UNTIL RETIREMENT
Figuring out the big picture
Align your compass with your destination. See if you’re saving enough, position your portfolio for growth, coordinate with your spouse, and keep yourself indispensable at the office.
What to do
Behind? Decide how to catch up. Even if you haven’t put away that seven-times-salary figure savings target, you can still make it to the finish line with what you need (12 times your pay at 65).
Your choice: Seriously power-save, or work a bit longer while saving a lot less, says Denver investment adviser Charles Farrell, author of “Your Money Ratios.”
Say you have five times your income; you could sock away 33% a year, or delay retirement 24 months while banking 20%. Either way, don’t miss out on catch-up contributions! Those 50-plus can put $5,500 extra in a 401(k), $1,000 more in an IRA in 2012.
Unsync with your spouse. Among two-income couples, nearly one in five retires in the same year, and another 30% within two years of each other, reports the Urban Institute.
But quitting in tandem isn’t necessarily the best move, says Tim Golas, a wealth manager in Avon, Conn.
For a 62-year-old couple, there’s a 62% chance the woman will outlive her husband — and the average length of widowhood is 12 years, per the Center for Retirement Research at Boston College. That’s for spouses the same age; on average, married men nearing retirement are almost four years older than their wives, the Urban Institute found.
“If one spouse works just a few years longer, you can draw less from your portfolio in those initial years,” says Golas. And that improves the chances the survivor will have assets to draw from.
Don’t quit on stocks — unless you really can. To achieve returns to sustain a 30-year retirement, you need to still be investing for growth. Stocks should make up 50% to 60% of your allocation, with the rest in bonds, says Rick Ferri, founder of Troy, Mich., Portfolio Solutions.
The caveat: Those within 10% of their ultimate savings goal can choose to dial back to 40%, he adds.
Keep the mortgage, maybe. Of course you don’t want to carry credit card debt into retirement, but what about the mortgage?
The old advice was to burn it before you left work, but in today’s low-rate environment, maybe not. Assuming that your rate is less than 5% and that you’ll be able to afford the payments from guaranteed-income sources in retirement — or, if you’re planning to move — there’s no rush, says San Diego financial planner Saleah Hewitt. You may do better by investing money you would have put toward the loan.
On the other hand, if you won’t be able to swing the nut later on, or simply want peace of mind, use the repayment calculator at bankrate.com to figure out how to erase the debt sooner.
Or consider a cash-in refi to a shorter-term loan. Say you have $200,000 and 20 years left on a 30-year mortgage at 5%. Refinancing to a 15-year at 3%, and putting in $50,000 would shave off five years and cut the monthly payment from $1,381 to $1,074. Keep up the original payment, and the loan will be paid off in 11 years, and you’ll save $10,300 in interest.
Manage down. Sure, you still want to dazzle your boss, but you’d better be working just as hard to make allies below you.
These young’uns are likely to move up the ranks over the next 10 years and have a say in whether you stay or go, notes New York executive recruiter Steve Viscusi. Hanging onto your job for the next decade will be essential to keeping your plan on track.
So train subordinates, mentor up-and-comers, even sign up for reverse mentorships (in which a junior person trains you on something new).
FIND A WAY TO DELAY SOCIAL SECURITY
While you can claim Social Security as early as age 62, your payment will increase by about 6% a year for every year you delay filing before your full retirement age (between 66 and 67 for most folks).
After that, holding off earns you another 8% a year until age 70. Altogether, for someone whose full retirement age is 66, the payment is 76% higher at 70 than at 62.
“With very few exceptions, you’re nuts to claim at 62,” says Evanston, Ill., financial planner Danielle Schultz.
That said, postponing may require you to rejigger your plans. So begin strategizing now. Start by determining what you’re entitled to, at ssa.gov/estimator, then consider the tactics here for putting off your benefit.
You may also want to use certain software — Maximize My Social Security ($40; maximizemysocialsecurity.com) or Social Security Solutions ($20 to $50; socialsecuritysolutions.com) — to run scenarios using your and your spouse’s ages, earning histories, and savings.
What to do
Stay on the job. If your portfolio won’t generate enough income to let you delay to 70, putting off your quit date can help, as you can build your savings and postpone drawing from them. Or, work part-time from 62 to 70 to replace the benefit you’d have received, says Jim Blankenship, author of “A Social Security Owner’s Manual.” (The max benefit for a 62-year-old this year is less than $2,000 a month.)
Benefit from your spouse. You have the option to collect payment on your spouse’s benefit instead of your own — assuming you are at least 62 and your better half has filed for benefits. The maximum is 50% of your partner’s payout; you must be at full retirement age to get it.
Best move: The spouse with the higher benefit should postpone collecting until 70, to maximize the bigger payout and possibly lock in a greater benefit for the other, says Baylor University professor William Reichenstein. And in the meantime…
...if you each paid into Social Security. The lower earner can claim his or her benefit as early as 62. The higher earner can claim 50% of that at full retirement age, then at 70 switch to his or her own benefit. The low earner’s check will be recalculated if the spousal benefit is greater.
…if only one of you earned a benefit. That person should file at full retirement age — allowing the non-earner to claim a reduced spousal benefit — then suspend his or her own payouts until age 70.