Get acquainted with what’s likely to happen down the road.
Effective retirement planning is a key component to broad financial planning. By the time you turn 50, you might start to consider what life may be like after you decide to stop working a traditional job, and how the myriad aspects (both financial and non-financial) of a work-free life could impact your happiness overall.
Here are four things to do when you’re about 10 years away from retirement.
1. Read your company’s 401(k) plan document
You’ll want to check for a provision called the rule of 55, which allows for penalty-free retirement distributions at age 55 or older. The only catch is that you’ll need to have separated from your most recent employer to take advantage of the penalty waiver. Note that while you’ll be able to skip out on the 10% penalty on any amounts withdrawn, you’ll still be liable for ordinary income tax on what you take out.
This is why it’s key to know if your 401(k) plan has any special provisions around retirement withdrawals, and to make sure that you’re compliant with all of your plan’s rules to avoid any costly errors.
2. Check your Social Security projection
Having a sense of what you’ll receive in Social Security income can help you figure out how much you’ll need to have saved by the time you retire. For instance, if you find out that you’ll receive $30,000 per year in Social Security benefits, and you spend $80,000 per year, you know you’ll have to come up with another $50,000 worth of income to be able to cover your costs in retirement.
This can come from either personal savings, investment income, part-time active income, or even from annuities, but knowing how much you’ll receive from Social Security helps to make retirement planning a bit more transparent. The beauty of checking early: You have another decade to improve your Social Security payout by earning more in the coming years.
3. Make use of catch-up contributions
Once you hit age 50, you’re able to contribute additional amounts to your employer-sponsored 401(k) and your IRAs. Specifically, as of 2023, those 50 and older can contribute an additional $7,500 to their respective workplace retirement plans, and an additional $1,000 to their IRA accounts. If you got a late start in saving for retirement, catch-up contributions can help you bridge the gap between where you are now and a healthier tax-advantaged retirement fund a decade from now.
Over time, you can add tens of thousands of dollars to both your net worth and your retirement nest egg; to the extent you can make this happen, it generally makes sense to go for it.
4. Create a plan around health insurance and long-term care
As you age, it’s likely that you’ll start to incur more health-related expenses. Since you can’t begin Medicare until three months before you turn 65, there might be a gap between when you retire and when you start your government-sponsored healthcare coverage. Even when it does start, you won’t be covered for all potential costs, and a Medicare supplemental plan is often necessary. Take the time to investigate these plans.
Finally, it’s important to have a frank discussion around the potential for long-term care in the event you become unable to care for yourself. Depending on your family dynamics and your spouse’s health, you may find that long-term care planning is either irrelevant or absolutely essential. Much of this decision revolves around how much you’ve saved up, as well as your hopes and desires for your care down the line.
If you do decide long-term care insurance is worth purchasing, make sure you can comfortably afford the premium. If you lock in a policy in your 60s, you’re less likely to suffer from sticker shock than if you were to wait until your health gets worse.
Have an eye on the future
Even if you’re not a classic “planner,” it’s smart to get ahead of retirement planning when you have some time to change course. Even if you’re only able to put together a rough sketch of how you think things might be, that’s a great place to start. A successful retirement encompasses all elements both financial and non-financial; be sure not to neglect either angle.
