Last Updated: December 19, 2024
Advance planning is key when it comes to this big step in your life. Living without a paycheck isn’t something to be taken lightly, and you want to make sure your retirement is as comfortable and stress-free as possible. That’s why there are some steps you should take before you exit the workforce.
1. Commit to a Retirement Budget
In the year before you say your final goodbye to the full-time workforce, you’ll need to nail down your retirement budget. It’s safe to say that your financial situation will change once you’re retired, and the sooner you’re able to gain a clear picture of what that will look like, the better off you’ll be. One easy way to budget in retirement is to come up with a total monthly spending amount similar to the example with Bob and Ellen in the lesson “How Long Your Savings Will Last By Budget.” Your Retirement Score will give you an idea of how long your savings will last you based on your monthly budget.
When creating your budget, don’t forget to account for large expenses like healthcare, and smaller ones that can sneak up and bust your budget, like cost-of-living adjustments. It’s always good to live below your means so you can build an extra cushion for unexpected expenses.
2. Maximize Contributions to Retirement Accounts
The money you save in these accounts is meant to last you the rest of your life. Let that sink in. Since there’s no way to know how long you’ll live (outside of averages, of course), you’ll have to shoot high. One of the best ways to do that is to contribute the maximum amount to retirement accounts like your 401k and IRA.
Of course, there are yearly limits on how much you can contribute, but these are increased for people over 50. So by your early 60s, you could have many thousands of additional dollars to spend in retirement if you’ve been taking advantage of these increased amounts since you turned 50.
3. Look into Long-term Care Insurance and Life Insurance
Just like healthcare (and death and taxes!), it seems insurance never goes away, even in retirement. And if you’re in your early to mid-60s, it’s not too late for you to purchase long-term care insurance and life insurance policies. Maybe you’ll never need them, but they can certainly be helpful if the unexpected happens. Learn more about both of these types of insurance in the lesson “Long-Term Care.”
4. Make Catch-Up Contributions
How much are catch-up contributions? Starting at the age of 50, you’re eligible to contribute more to your retirement accounts, like your 401k and IRAs. The catch-up contribution limit for 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan for employees ages 50-59, remains at $7,500 for 2025. New for 2025, based on changes made under the SECURE Act 2.0, a higher catch-up limit of $11,250 now applies to employees ages 60-63 who participate in these plans. The IRA catch-up contribution limit for individuals aged 50 and over remains unchanged at $1,000.1
5. Refinance or Downsize Your Home
Will you be moving in retirement? Whether you’re hoping for a smaller mortgage payment (or to avoid one at all!) or a warmer, more retirement-friendly climate, it’s best to take this step before you start your retirement. It’ll be easier for you to obtain a mortgage while you still have a paycheck. In addition, closing costs, taxes, moving expenses and other hidden fees often make purchasing a new home more expensive than it seems at the start.
6. Review Portfolio Allocation
One thing you may wonder about as you approach retirement is whether your money is invested properly. You’ll want to ensure you have the right mix of aggressive and conservative investments, based on your individual situation. It’s only natural to want to “de-risk” your portfolio as retirement approaches. But remember, if you’ll be retiring in your early to mid-sixties, you’ll still need to account for some amount of inflation in the future. You can offset this by keeping a small portion of your stocks in more aggressive investments. Then, the rest of your money can be held in a more conservative investment than you’ve had in the past.
Before you decide what allocation is right for you, review your budget - or create one ASAP and start living off it - and see how it’s working for you. Will you be relying heavily on money from your portfolio during retirement, or will you be largely comfortable without it? What other sources of income will you have in retirement like a pension, property rental, or dividends? Once you understand how much you need to rely on your portfolio to cover your spending, you can determine how much risk you want to take in your portfolio.
Let’s say you need to rely on your portfolio to cover your expenses while in retirement. This means you should take fewer risks in your portfolio by buying more bonds instead of stocks. Typically, retirees who enter into retirement have a 60/40 bonds-to-stock ratio in their portfolios.
7. Fully Fund Your HSA
A well-funded HSA can be a huge help for anyone, but that’s particularly the case if you’re hoping to retire in the years before Medicare kicks in. All healthcare options for retirees who don’t yet qualify for Medicare are expensive; there’s no way around that (see the next lesson “Healthcare Options for Retirement at 60 to 64” for a breakdown of your options). But an HSA allows you to withdraw the money you’ve saved to use on qualified medical expenses at any age. And once you turn 65, you can use your HSA funds for non-medical purposes, but the withdrawals will be subject to ordinary income taxes. Don’t forget that your HSA can be invested, which can be another tax-free investment vehicle for your retirement.
8. Build an Emergency Fund
By your early to mid-sixties, you’ve got several different options for liquid assets if you’ve been saving in a few different investment accounts. You can now tap into your 401k without penalty, which wasn’t the case if you retired before the age of 59 ½. But if you don’t want to do that, use these last few months or years of work to build a stash of liquid assets like cash that you can keep at the ready in the event of an emergency or other unexpected expense.
SOURCES
- “401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000.” IRS.gov, 1 November 2024, https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000. Accessed 1 November 2024.
