This is part 3 of the nearing retirement series. It’s getting down to the wire with only one year left till retirement. Hopefully, those of us with 1 year left already read the 10 and 5 years from retirement posts and are prepared. If there is a big shortfall, it will be very difficult to catch up at this point. Let’s see what Money Magazine has to say.
Money Magazine: With one year left before retirement, savings should be 11.4x household income. Their target retirement saving is 12x your pay when you’re 65.
As I said in previous articles, I think it’s better to use your expenses as a measuring stick. Your target saving at 65 should be 25 x expenses. With only 1 year out, you should be at 25 x expenses or just a bit short.
Now Dial Back On Stocks
Money Magazine: The max you should have in stocks is 40%-50%.
This is a good idea. The stock market can be very volatile in the short term and you wouldn’t want to bank your retirement on it. I still lean toward the high end (50%) though since I’m an aggressive investor. If you don’t plan to withdraw for another 5 to 10 years then you should have more assets in stocks, especially if you are an early retiree like me. I’m still under 40 and I won’t draw down my retirement portfolio for another 20 years so our target stock allocation is currently very high at 70%-80%.
Stress-Test Your Spending
Money Magazine: You should have a good idea of your yearly expenses now. See if Social Security + pensions + part time work + 4% withdrawal from your retirement portfolio will cover your expenses. If not you will need to trim your budget. Practice living on your post retirement budget now to make sure it’s realistic.
My wife and I did this exercise for two years before I retired from my engineering career. It’s a big relief to be able to cover our expenses without having to draw down our retirement fund. Don’t count on having a big reduction in expenses once you retire. There will be other expenses like healthcare and hobbies. Trimming your budget down to a non luxurious level is the key to having a sustainable budget.
Pick Up the Pension Check
Money Magazine: Lucky enough to have a traditional pension? Find out what choices you have and figure out which is best for you. Don’t take a lump sum because it’d be tough to generate the same income the annuity version guarantees over a long retirement. Figure out if you want survivor option.
I faced the same situation with my small pension. I’m leaning toward rolling the lump sum over to my IRA. However, I’ll hold off until I see the result of the 5, 10, and 20 year projections first. I’ll have to sit down and do a more thorough calculation to see which option is the best.
Money Magazine: Enter retirement with enough cash to fund the first 12 months of living expenses, separate from your emergency fund. With one year left, funnel money into a savings account and reduce 401(k) contribution if needed. Move a portion of an IRA into a short-term bond fund as a backstop.
Some readers questioned my $50,000 fund in my saving account because it’s only earning 1.05% interest. When you have a big change in income due to change in employment or retirement, you really need a big cushion in case something goes wrong. One year of expenses in cash is a pretty good number, although I would be a bit more comfortable with 18 months. In the event of a market crash, I can hold off on selling for a while.
Know the Medicare Windows
Money Magazine: Retiring before 65? Now is the time to figure out health insurance coverage. Retiring around 65? You can sign up for Medicare from 3 months before or up to 3 months after your birthday month. Enroll beforehand and coverage starts on the first day of your birth month. After, and it will be delayed up to six months. Retiring after 65? Sign up for Part A, which is free, pays for hospital care, and may cover gaps in your employer plan.
I’m not 65 yet so I haven’t thought about Medicare much. My mom is going to turn 65 in 2013 though, so this is a great reminder to get her signed up. Healthcare is a huge obstacle to early retirement in the United States. Luckily, Mrs. RB40 is still holding a full time job so Baby RB40 and I are covered by her employer’s plan. If she retires at 55, we will need to figure something out. Maybe we’ll need to move to another country if the healthcare cost in the US continues to spiral out of control.
Wow, with one year left, there isn’t a lot of time left for course correction. If you’re not on target, you might need to work a few years longer. Another option is to find an enjoyable part time gig so you can work much longer, which will let you delay withdrawal from your retirement saving and let it grow. Ensure that you are prepared before you make the break.
Are you preparing for a big transition over the next year? One year is a very short time. Next week, we’ll see if Money Magazine has any advice for those of us that are 1 year into our retirement.
Other articles in this series: