You know that feeling when you've been flying all day and you’re almost to your vacation destination?
You’re tired. You've changed time zones, and everything seems just a little off. As your plane is on approach, you know you should organize everything, but the thought is exhausting. You need to collect your trash, assemble your scattered belongings, and maybe dig out some gum.
You should be excited because your vacation is about to get fully underway, but wrestling with the logistics leaves you weary and nervous — you know it’s going to be great but you can’t help wondering what you've forgotten.
That feeling can be similar when you’re “on approach” to retirement. Here are eight tips to help you work out those pesky logistics so that you’ll be in a position to really enjoy stepping into those golden years:
1. Put your budget on approach to retirement. Gradually reduce your monthly budget over several years until you reach the level of spending that you've budgeted for your retirement years. You’ll avoid retirement sticker shock, plus you should be able to contribute more money to your 401(k) – because that budget surplus has to go someplace.
2. Take advantage of catch-up contributions, which help you to make a final push toward your retirement goals. Beginning the calendar year you turn 50, the IRS increases your 401(k) contribution limits. For example, people age 50 or greater in 2013 can contribute an extra $5,500 on top of the standard $17,500 limit. (Other retirement plans have different limits.)
3. Stay invested in equities. Don’t make overly aggressive moves with your retirement savings, but do remain invested across several different types of investments. Investing as you approach retirement involves a balancing act – balancing the need to protect your savings with the need to increase your savings to outpace inflation.
4. Decide what you’re going to do with your retirement dollars when you initially retire, and have everything ready to go when the day arrives. You don’t want to retire and find yourself without income for three months because you submitted your paperwork late. Options to consider include leaving your money in your plan (if allowed) and taking 401(k) distributions, or rolling your money to an IRA. I generally advise against taking a lump-sum cash distribution of all your savings, however, as you’re responsible for ordinary income taxes on all pre-tax contributions and earnings and you could bump yourself up several tax brackets.
5. If you have any doubts about whether your savings will last through retirement, work a little longer. Financially, it’s a win-win-win scenario. Another year of work gives you another chance to max out your 401(k) contributions and gives your investments one more year to grow. Plus it’s one less year you’ll be drawing down your retirement savings.
6. Get long-term care insurance. Long-term care isn't covered by health insurance, so it can deplete a retirement nest egg at an alarming rate. Most people will be in a better position to receive more favorable underwriting on long-term care insurance during the approach to retirement, instead of waiting until after you retire.
7. Get life insurance. If you want to leave a legacy for your family, life insurance can be a good way to do so. In most cases, as long as you've taken care to designate beneficiaries appropriately, the death benefit will be tax-free. As with long-term care insurance, you’re likely to receive better underwriting during the approach to retirement than you will post-retirement.
8. Find a financial adviser you trust. Don’t work with someone who pushes you toward products that make you uncomfortable. You want an individual who will thoughtfully help you make tough financial decisions and manage your investments.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.