If you're like most people, you'll be working with a smaller budget and making other notable changes when you retire. That's why most people benefit from a retirement test drive. It paves the way for a smoother transition to retirement by helping prepare you both mentally and financially for the multitude of big changes you'll face when you really do retire.
You wouldn't buy a car without test-driving it, and the importance of getting retirement right dwarfs that of getting the right car. So, seriously, take retirement out for a spin.
Here's what I mean: One to five years before you plan to retire, start to live like you're already there. Obviously you can't do everything you'll be able to do when you've stopped working. (And at the risk of stating the obvious – keeping your job is very important for this exercise.) But you can kick the tires of some retirement-like circumstances to see how it will work.
Here's a test-drive checklist:
Adopt your retiree budget. This is the most important checklist item. First, estimate what your monthly retirement income may be, based on your retirement nest egg and timeline to retirement. Next, establish a spending budget to fit your estimated retirement income. And finally, try it out.
Spending a year or two living on your retirement budget before you actually have to is a good way to see whether it works – if it doesn't, you'll need to re-do the budget or delay retirement so you can save a little more. It'll be easier to keep working longer than it will be trying to re-enter the workforce after retirement. As an added bonus, chances are good you'll have extra money each month during this retirement budget test drive; throw that straight into your nest egg for an added boost.
Go ahead and downsize if that's in your plans. Even if you don't move to your retirement apartment, condo or house, consider moving to something similar if you can – perhaps you can rent for a couple of years. This is your chance to ensure you're OK with downsizing before it's too late. Once you've retired, it will be difficult to upsize on a limited budget. You can always delay retirement or save extra money to pick up any slack so you can find the perfect size for your retirement digs.
Transfer your transportation. A lot of retirees plan to save money by using mass transit, walking, bicycling or downgrading to an inexpensive car. Spend a few years figuring out whether you can live with this money-saving transit option. If you hate it, plan accordingly.
Explore your intended retirement hobbies and activities now. Planning to take up golf? Photography? Woodworking? Take lessons now to see if you like it. You'll spend money on necessary supplies and gear while you're still working, which means you'll spend your working dollars rather than your retirement dollars.
Get involved with your new location. Thinking of moving to a new city or neighborhood? Making a change from rural to urban or urban to suburban? It's probably not feasible to move there during your retirement test drive, but depending on how far away it is, you may be able to join a community organization in your desired area. Visit frequently and participate in the community so you can meet people. Figure out whether you really want to make that move.
The retirement test drive is your opportunity to position both you and your budget to thrive during retirement. In addition to being a great way to test your expectations and your preparedness, it's also a means of easing into retirement and reducing the shock that could come from making so many changes at once.
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.