The November issue of Money magazine contains a bunch of retirement articles. It must be their retirement issue. I am planning to evaluate each article one at a time to see if I agree with their position. Last week, we went over where you should be if you have 10 years before retirement. This week we’ll take a look at 5 years out. This scenario also applies if you want to change careers or to become a freelancer in 5 years. You need to be prepared for a big reduction in income and this checklist will help you measure your progress.
Money Magazine: With 5 years left before retirement, the saving target is 9.4x household income. Their target retirement saving is 12x household income when you’re 65.
As I said in the 10 years out article, I think it’s better to use your expense column as a measuring stick. The target at 65 should be 25x expenses. With 5 years out, you should probably be around 20x expenses.
See if you need a course correction
Money Magazine: If you haven’t managed to accrue 9.4x household income, then you need to examine your saving and spending rate. You may be able to retire on less or get to your goal by working longer. A one-time review with a financial planner who charges by the hour can be worth the $1,000 or so investment to help you figure out where you stand.
5 years will fly by very quickly. Again, I think it’s better to use your expense as a yard stick and shoot for 25 x expenses. If you use 25x as the target, then you can draw down your retirement saving at the 4% safe withdrawal rate. Making an appointment with a financial planning is worth it. They can go over your total portfolio and give recommendations. Retirement is a big change and your investment will have to change too. Even if you’re nowhere near retirement age, it’s worth talking to a financial advisor. Read about my financial planning session with Personal Capital. That’s even better because it didn’t cost me anything. Working longer is also a valid option. If you’re tired of the same job, then perhaps see if you can consult or freelance instead.
Examine Healthcare Cost
Money Magazine: This is the time to estimate the cost of health insurance and any out of pocket expenses. If you plan to retire before Medicare kicks in at 65, then you could have a big expense ahead. Be aware that Medicare isn’t free and costs about $4,600 on average.
Healthcare is a huge problem in the US. It’s very expensive and everyone needs to make sure they allocate some funds for health insurance. I think healthcare will go through a lot of big changes over the next 20 years so I’m not going to worry too much about it now. Once we are 60, we’ll take a closer look at it. One alternative is to think about moving to a country with a more retiree friendly healthcare system like Canadaor Thailand.
If you are quitting your job to go it alone, you really need to figure out the healthcare cost before you quit. It can take a big bite out of your freelance income. Unfortunately, many entrepreneurs can’t afford healthcare and are going without a big safety net right now. Here are some Healthcare Options for early retirees and self employed.
Plan for Long Term Care
Money Magazine: A year in a nursing home can top $78,000. Long term care can drain your savings very quickly. Insurance can help, but the premium can cost as much as $4,000 per year for a couple in their early 60s. Buy only if your assets total $250,000 to $1,500,000. If you have less, you’ll probably run out of money and can qualify for Medicaid. If you have more, you can pay your own way. If you’re going to buy, do it now because the older you are, the higher the cost.
This is another big problem in the US. While our families don’t have a history of needing long term care, who knows what can happen? Again, a way to alleviate the cost is to move to another country with more affordable healthcare cost. Long term care south of the border is much more affordable than in the US and many retirees are considering this option. I have also been reading good things about Ecuador and the Philippines.
Money Magazine: Think about downsizing or moving to a cheaper area. Once the kids are out of the house, you won’t care much about being near the right school, so moving to a cheaper neighborhood with low-scoring schools will cut your costs dramatically. It’s time to research potential retirement locations.
I think moving after retirement is a great way to reduce monthly expenses. If you are not tied down to a location, take some trips and see if you can find a good retirement spot. Personally, I like Central/South America and Southeast Asia. The cost of living is much cheaper than the US and I like the warmer climates. Once Baby RB40 is out of the house, I’ll try to convince Mrs. RB40 to move overseas (at least for a few years.) By that time, she’ll probably be ready for retirement.
Practice your retirement job
Money Magazine: Begin laying the foundation for any work you’ll do in retirement. Ease the transition by getting credentials or using relevant volunteer work to reorient your resume. If you want to consult, start your business before you retire and lose all your contacts.
I started blogging 2 years before I left my job and the time spent really eased the transition. If I didn’t have an online business, I probably would have felt compelled to grind it out a few more years.
Keeping active in retirement is the way to go and a part time job/business will help ease the financial transition as well. If you have 5 years before retirement, it’s time to figure out what you would like to do in retirement. The same applies for a career change or going freelancing. It’s better to try it out for a few years while you still have a full time job. Once you get some traction, it’s much easier to quit and live on the reduced income. Starting your business while you’re working full time also let you project income and expenses more accurately. I kept track of our income and expenses over the final 18 months and I found that I could retire early without drawing down our retirement saving. This gave me the confidence to quit my engineering career.
Are you preparing for a big transition over the next 5 years? It really isn’t a lot of time. Next week, we’ll see if Money Magazine has any advice with only 1 year left before retirement.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.