Heading into retirement

Planning to retire in 5-10 years? Here’s what to start doing now.

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Tips and to-dos from money guru Jean Chatzky

You're planning to retire in the next five to ten years? Fantastic. The moves you make in the interim can ease your transition into the next phase of life in a big way. Here's what you need to do:

Take stock:

How are you doing when it comes to your retirement nest egg? Fidelity's guidelines 1 note that you should have 6x your current salary put away by the time you hit age 50, 8x by age 60, and 10x by age 67. If you're not there, it's time to strategize with your spouse (if you have one), as well as your financial advisor (likewise), for how to make up ground. This is also a good time to pull your most recent benefits estimate from the Social Security Administration (make sure your earnings history is correct), as well as look over any other pensions coming your way—and to revisit these three very important questions: What do I earn ? What do I own ? What do I owe ?

Talk about your plans:

If you're married, it's time to get vocal about what you want and what your spouse wants when it comes to this next phase of life. That's the only way you'll be able to meet in the middle. You'd be surprised at how many couples aren't on the same page about not just what they envision in retirement but when they believe it will happen—and where they'll be living when it does.

Accelerate debt repayment:

The happiest retirees with the least stress are the ones who leave their day-to-day work life completely debt free. If your retirement savings accounts are funded and on track, review your debt. Top of the list, as always, is the high interest rate debt (generally from credit cards) that can be a savings killer. But if you can also make headway when it comes to your mortgage (or even better, erase it completely), you'll be able to breathe a little easier when your income subsides.

Make catch-up contributions:

Once you hit the big 5-0, you can contribute more to your retirement accounts each year—and it's a good idea, especially if you're already maxing out your retirement savings each year to hit the IRS limits. An extra $6,500 in 2020 in your 401(k) or 403(b), $3,000 in your SIMPLE, and $1,000 in your IRA or Roth annually can go a long way. And, if you have a Health Savings Account, you can kick in an extra $1,000 a year once you turn 55. (Note: You and your spouse can each make separate catch-up contributions.)

Create a social security strategy:

Two-thirds of Americans leave money on the table when it comes to Social Security—many of them hundreds of thousands of dollars. 2 How? They take their benefits too early. Every year you wait between age 62 and 70, your benefits grow by about 8% guaranteed. That's a return that's tough to beat. And it's why, overall, you typically want at the higher earner in your family to wait as long as possible. Unfortunately, divorce, disparate ages, and earnings histories among spouses complicate matters.

Strategize to make your money last:

Retirement can last 30 years. Sometimes more. That means even when you leave the workforce entirely, you will still very likely want a percentage of your money in stocks, depending on your age and risk tolerance. You'll also, however, want to be working on a strategy for how you're going to turn that money into a lifetime paycheck. Many people rely on what's called the 4% Rule. This means that you can withdraw about 4% of your portfolio each year and know that your money should last 30 years. The about in this definition is key. When the market is having a down period, you need to be facile enough to withdraw less. Other people buy an immediate fixed or deferred fixed annuity, which turns a lump sum into a paycheck either today or at some point in the future. The important thing is to have a strategy. A financial advisor can be a huge help here.

Plan to minimize taxes:

Once you start cashing out traditional IRAs and 401(k)s, the government takes a bite (withdrawals are taxed as ordinary income). The conventional wisdom is to draw from taxable investments first and let retirement-plan money grow tax-deferred. Save Roth IRAs for last, since you never have to take withdrawals. That's a guideline, not a hard and fast rule. If, say, 401(k) or 403(b) withdrawals push you into a higher tax bracket, take out just enough to stay in a lower tax bracket and pull the rest from your Roth.

Do this again next year:

Planning for retirement is a process, not a one-and-done event. Go back through these bullets at the same time next year and make adjustments to keep you pointed in the direction you want to go.

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Investing involves risk, including risk of loss.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
1. The 10x savings rules of thumb are developed assuming age-based asset allocations consistent with the equity glide path of a typical target date retirement fund, a 15% savings rate, a 1.5% constant real wage growth, a retirement age of 67 and a planning age through 92. The replacement annual income target is defined as 45% of pre-retirement annual income and assumes no pension income. This target is based on Consumer Expenditure Survey 2011 (BLS), Statistics of Income 2011 Tax Stat, IRS 2014 tax brackets and Social Security Benefit Calculators. Fidelity developed the salary multipliers through multiple market simulations based on historical market data, assuming poor market conditions to support a 90% confidence level of success. These simulations take into account the volatility that a typical target date asset allocation might experience under different market conditions. Volatility of the stocks, bonds and short-term asset classes is based on the historical annual data from 1926 through the most recent year-end data available from Ibbotson Associates, Inc. Stocks (domestic and foreign) are represented by Ibbotson Associates SBBI S&P 500® Total Return Index, bonds are represented by Ibbotson Associates SBBI U.S. Intermediate Term Government Bonds Total Return Index, and short term are represented by Ibbotson Associates SBBI 30-day U.S. Treasury Bills Total Return Index, respectively. It is not possible to invest directly in an index. All indices include reinvestment of dividends and interest income. All calculations are purely hypothetical and a suggested salary multiplier is not a guarantee of future results; it does not reflect the return of any particular investment or take into consideration the composition of a participant's particular account. The salary multiplier is intended only to be one source of information that may help you assess your retirement income needs. Remember, past performance is no guarantee of future results. Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical calculations. Returns also will generally be reduced by taxes.
2. "Trends in Social Security Claiming," The Center for Retirement Research at Boston College, May 2015.
Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author, as applicable, and not necessarily those of Fidelity Investments.
Jean Chatzky is not employed by Fidelity but may receive compensation from Fidelity for her services.
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