The Most Important Money Steps to Take the Year Before Retirement

Even though you’re still busy working, the year before retirement is a key time to review your finances and make decisions that will affect the rest of your life.

You need to take specific financial steps to ensure the comfortable and worry-free retirement you’ve always imagined. Make sure to address each of the tasks below before you savor your retirement cake in the break room and collect your last paycheck.

Key Takeaways

  • The last year before retirement is a crucial time to set yourself up financially for the transition.
  • Create a budget and set up your portfolio to produce enough income by determining your withdrawal rate and investment options.
  • Understand Medicare, decide when to claim Social Security, and if need be, refinance your mortgage.
  • Finally, to prepare emotionally, figure out what you plan to do with your time in retirement. 

Create or Update Your Retirement Budget

Put together a detailed monthly budget estimating your expenses during your first year of retirement. Then do the math to make sure you can afford to withdraw from your retirement accounts the amount you’ll need to fund your spending after accounting for any other sources of retirement income you might have, such as Social Security or a pension. Plan to withdraw enough to meet minimum distribution requirements and avoid tax penalties but not more than you need.

You don’t want to have money sitting in a checking account that you can afford to keep investing in a tax-advantaged retirement account. And unless your account is a Roth IRA, with no taxes due on withdrawals, you don’t want to pay more in taxes on distributions each year than you have to.

If your estimated budget comes up short, better to find out while you’re still working. You might be able to postpone retirement if you need to save more⁠—if not, at least you have time to rework your budget before you start spending.

Adjust Your Portfolio for Income

Adjusting your portfolio to allow withdrawals, while managing the remaining funds so that they last throughout your retirement years are critical steps to ensuring you don't run out of money. Some questions you need to ask yourself include:

  • Which retirement withdrawal rate will you use to make sure you don’t outlive your assets? 3%? 4%?
  • Which investments will you sell each year to achieve that withdrawal rate?
  • And are your assets allocated so that you won’t have to sell investments at a loss for retirement income in a down market?

If you need help answering these questions, don’t be afraid to spend money getting a few hours of advice from a professional financial planner. You don’t have to hire someone indefinitely, and you don’t have to turn over your assets for an advisor to manage.

While your portfolio needs a margin of safety, beware of playing it too safe.

Your retirement portfolio needs to sustain you for perhaps three decades, which means there’s no need to sell all your stocks the day you retire. And if you think average returns during your retirement years will be lower than historical returns, you definitely don’t want to have too much of your retirement portfolio allocated to cash or bonds. Your returns won’t be high enough to sustain your portfolio long-term.

Learn How Medicare Works

Without employer-provided health insurance, if you’re 65 or older, you’ll be relying on Medicare in retirement. Educate yourself about Medicare’s four parts, what each covers, when to sign up, and how much you’ll pay in premiums. Learn which coverage gaps you might face and whether your existing providers accept Medicare. Prepare to have the best coverage for you at a price you can afford and start learning about your new insurance before you have to use it. In this way, you'll understand how it works and will be less likely to face unpleasant surprises.

Depending on how Medicare compares with the coverage you have now, you may want to time elective procedures strategically for while you're still working to save money. And for things you need that Medicare doesn’t cover, but your employer might—such as dental procedures, glasses, and contact lenses—take care of them now.

Refinance Your Mortgage (Maybe)

If you were thinking about refinancing your mortgage, you might want to do it now, as getting approved may be easier when you’re still employed. It’s not that you can’t be approved once you’re retired, but it’s a different process. Lenders calculate what you can afford based on your retirement assets using an asset drawdown or asset depletion method.

If you have ample retirement assets, qualifying may be a snap. If you don’t, you may need to get a loan now. If you fall somewhere in between, be aware that while you might qualify to refinance after retirement based on your assets (plus any income from Social Security or a pension), you might not qualify to borrow as much as you will while you still have income from work.

Don’t feel pressured to follow the conventional advice to pay off your mortgage before you retire. Dumping extra cash into your home means that money isn’t available for other purposes. If you later need to borrow against your home because you need that money back, you might pay a rate that’s higher than what you’re currently paying.

Decide When to Claim Social Security Benefits

If you haven’t started collecting Social Security benefits already, figure out when you’ll do so. Do you need the money as soon as you retire, or would you rather wait? The government bases your monthly check amount on whether you've reached full retirement age (or are past it, up to age 70, when you get maximum payments). Think about your health and your family history; you won’t necessarily come out ahead overall by waiting for that bigger check.

And read up on how your other sources of retirement income can affect the taxability of your Social Security benefits. Taxes on taxes? Yup. That’s Uncle Sam for you.

Determine How You’ll Spend Your Time

To avoid the depression that might accompany not being around coworkers and not having a sense of purpose from going to work every day, make detailed plans for how you’ll structure your days. Think about what will give you feelings of accomplishment and pleasure once you’re retired.

At first, you might not be able to get enough of sleeping in and catching up on all those movies you never had time to watch. However, after a while, you might feel restless or unmoored unless you do things. Think about joining meetup groups to socialize and do interesting activities, volunteering with charities whose work is meaningful to you, pursuing hobbies to the level of real mastery and expertise, even going into business for yourself.

Also, know that retirement has stages. Plan ahead for how you want to spend the first years after you leave work and what you think you may want to do later.

The Bottom Line

The last year before you retire can be a busy time and an emotional one. You might be trying to wrap up projects at work and hand off responsibilities to others. You might also be cementing relationships with coworkers that you hope to continue once you leave the workplace.

But be sure to use your free time now to do the required research and, if you need help, meet with a financial planner to set yourself up financially. Handling these tasks up front will set you up to enjoy the worry-free retirement you deserve.

Article Sources
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  1. Internal Revenue Service. "Traditional and Roth IRAs."

  2. "What's Medicare?"

  3. "What's Not Covered by Part A & Part B?"

  4. Social Security Administration. "Your Retirement Benefit: How it's Figured," Page 1.

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