Sometimes people get caught up in the numbers so much that they forget why they're saving for retirement. At the beginning of your career, you may not have known what you wanted to do.
Now that you've officially joined the ranks of pre-retirees — people who are around five or ten years away from retiring1— you probably have a much better idea of what you want. It's time to put that perspective to work. Here are eight steps to get you started.
1. Make a Wish List
One of the first things you should do when you're securing your income is to decide how you want to use your money2. This makes a big difference in how you will position your assets over the next few years. Some things to consider are whether you want to do some traveling, make large purchases or sell significant assets, such as your home.
2. Determine Your Financial Situation
After you decide what you want your money to do in an ideal situation, then you can figure out the reality of your accounts3. Begin by determining your net worth. Take all of your assets and subtract all of your debts. Make sure to do this in an organized way — you will want to reference each line item and its corresponding value later. Here are some examples of items many pre-retirees include in this list:
- Each retirement account
- Valuable assets, such as cars, homes or antiques
- Individual securities
- Investment brokerage accounts
- Secured and unsecured debts
3. Identify Strengths and Weaknesses
After you take a look at your finances, you will want to form a strategy. A good way to start is to do a SWOT analysis4. Strengths and weakness are internal factors that could affect your strategy, while opportunities and threats come from the outside. Here some hypothetical entries for each category:
- Strength: Diversification
- Weakness: High volatility
- Opportunity: Favorable market position
- Threat: Upcoming tax-law changes
4. Set Money and Investment Goals
After you have determined your goals, examined your resources and developed some strategic perspectives, you can then set specific goals5. If it looks like you don't have enough put away for retirement, you might join some of your fellow pre-retirees in making a goal to reduce spending6. Now would also be the time to consider how your current portfolio would work in terms of capital gains tax, as well as other tax penalties or deductions.
5. Pay Down High-Interest Debts
You may also realize that you have some debt to handle before a comfortable retirement. The interest you're paying to your creditors subtracts directly from the money your investments earn. For example, if you carry credit card debt with a 10-percent interest rate, it would typically make more sense for you to pay that off before investing7 in anything with a projected return lower than 10 percent. On the other hand, certain investments may be advisable if your only significant debt is a low-interest mortgage.
6. Start Planning Post-Retirement Projects
If you're like many pre-retirees, you don't often think in detail about what you're going to do after retirement8. It might be worth it to plan out a couple months or a year of activity9 immediately following retirement. The purpose wouldn't be to set an itinerary to follow to the letter. Instead, you would be confirming or correcting your expectations of how much time your plans might take. While it is a little less fun than playing in the projects themselves, budgeting your activities may also give you a practical idea of how much money you will end up spending.
7. Review Your Plan Annually
The one thing that retirement plans have in common is that they change. You'll need to review and update10 your holdings and market positions so they can help you with your goals. Certain types of assets, such as mutual funds, are professionally managed to maintain specific goals, such as a stable long-term growth rate. Others, such as stocks, would put more responsibility with you as an investor.
The good news is that you don't have to become a day trader in order to retire with enough assets to keep you healthy and happy. A thorough analysis every year and after every major event is often enough to keep most strategies up to date. In fact, you will probably want to continue this regular financial check-up during your retirement.
8. Modify Your Strategy as Needed
Many pre-retirees consider leaving your job if you have an offer on the table to retire early. Other challenges or opportunities11 might come up. You can evaluate these possibilities 12 much more easily once you have a complete understanding of your finances and goals. In fact, the only way you can make an informed decision is within the context of your own individual situation.
Follow these steps to identify your goals, form strategies and modify your plans as necessary. Keeping your investments healthy is certainly work. However, it usually won't amount to even a part-time job, especially not with ample planning and good advice.
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All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.