Financial Planning as You Prepare to Retire

Retirement involves some of the most critical financial planning decisions of your lifetime. Careful financial planning during your working years helps establish a solid retirement plan that can provide financial and psychological assurance in later years. Additional planning as you prepare to retire supports earlier efforts and helps to fine-tune your financial decisions to ensure a successful retirement. Here’s what you should focus on as you prepare to retire.

Healthcare Costs and Coverage in Retirement

Health insurance is a large expense during retirement. To protect your physical and financial wellbeing in the future, it’s critical to evaluate how your health coverage and costs might change. If you’re retiring before age 65, the age at which you can apply for Medicare, compare COBRA coverage and open market rates. Health insurance coverage costs for individuals nearing retirement can easily top $1,000 per month.

Even if you have Medicare, assess how much your Social Security check will be diluted by Medicare premiums, supplemental coverage costs and other out-of-pocket medical expenses.

Sick and Vacation Leave

Sometimes it’s wise to use up your sick and vacation leave before retiring. Other times this isn’t the best approach, particularly if you’re eligible for a pension. Pensions are frequently based upon years of service, and you may be able to allocate your accumulated leave toward a higher pension payment. The financial benefits could far outweigh the short-term benefits of using the leave.

Loan Qualification

A significant financial change that’s often overlooked as you enter retirement is your ability to qualify for a loan, particularly a mortgage. If you’re thinking of moving, refinancing or applying for a loan, explore your loan qualification potential while you’re still employed. You should also consider securing a home equity line of credit (HELOC) while you still have the income to qualify. Securing a line gives you the ability to access capital in an emergency. However, you shouldn’t draw upon the line of credit before entering retirement.

Credit Card Debt

If you have credit card debt, focus on paying off all balances in the year before retirement, if not sooner. You need to be sure you can live without incurring credit card debt before formalizing your transition into retirement.

Large Expenses

To eliminate future worries, it can be tempting to advance large anticipated expenses prior to retirement. Some advance purchases might be smart, particularly if the dollar amounts are unknown and could destabilize your retirement finances. However, before you make any large purchase in the lead-up to retirement, ask yourself if the item you’re replacing still has a viable lifespan, such as a car that could stay road-worthy for many years, or a roof that’s still in decent shape.

It’s certainly important to embed such expenses in your retirement budget. Even something that’s new now will eventually need replacing. Make sure you include such expenses in your retirement planning projections.

Realistic Retirement Needs

One of the most important actions before you commit to retirement is assessing your retirement needs relative to future income and available assets. Take a critical look at actual spending figures over the past few years. You may be surprised how things like new tires, vacations and other non-recurring expenses can impact your budget.

Your Retirement Plan

If you haven’t already done so, engage with a retirement planning specialist to critically evaluate your retirement preparedness. There’s a lot to consider, such as spending, taxes, Social Security benefits, and more. Consider "what-if" scenarios to help you visualize your finances in retirement, and determine if you will be spending more in retirement to occupy the 40 hours a week you’re no longer working.

While some individuals might be able to return to work if needed, for most people this can be challenging, particularly with a gap in employment and the potential for age discrimination. If you’re not sure about retirement, particularly the psychological transition or financial aspects, consider part-time hours or explore a leave of absence or sabbatical. This might allow you to test-drive retirement without committing to it.

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