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Nearing Retirement? 5 Strategic Personal Finance Moves

(posted: October 17th, 2016)

Are you 60-something? Starting to think about retirement?

You've likely taken advantage of various retirement plan options throughout your career, socking away a nice nest egg.

But there are a few more things you should consider doing as you get closer to retirement.

The average retirement age in the United States is 63. Even if you, like many people, are choosing to work into your late sixties or even your seventies, your 60's are a good time to start seriously planning, and making, some strategic financial moves for a financially solid retirement.

5 Things to Do Before You Retire

1. Decide When to Start Drawing Social Security
Most people don't realize that Social Security is intended to replace only a portion of your pre-retirement income. Nevertheless, you can make it a point to get the maximum. Your benefits are based on the amount you earned while you were working, and you are allowed to start collecting Social Security as early as 62. BUT...you'll maximize those benefits if you wait until your full retirement age, which differs depending on when you were born:

  • 66 for those born between 1943 and 1954
  • Somewhere between 66 & 67 for those born between 1955 and 1959 (yes, the SSA dates include months, so for example your full retirement age, if you were born in 1955, is 66 years and 2 months.)
  • 67 for those born in 1960 or later

If you do take your benefits at 62, they will be reduced by 6.67% a year for up to three years and then 5% a year thereafter. So, if your full benefit amount is $2,000 a month and your full retirement age is 66, taking benefits at 62 would bring that monthly payment down to $1,500. If you delay retirement past your official retirement age, you get an 8% benefits boost up until you reach 70, at which point the incentive runs out. Using our example, waiting until age 70 to collect would result in a monthly payment of $2,640.

Keep in mind that whatever benefit amount you initially lock in will remain in effect for the rest of your life.

2. Pay off your mortgage
This is probably obvious, but the less debt you have going into retirement, the easier it will be to get by on a fixed income. Since mortgages are a major source of debt for many Americans, paying it off if you can is a good plan.

You may not be in a financial position to get rid of your mortgage prior to retirement, and you're not alone. In 2001 22% of homeowners over 65 still had mortgages; as of 2011 it's increased to 30%. But if you are right on the edge, and working an extra year would let you enter retirement mortgage-free, it might be the best choice to work longer before retiring.

3. Create a retirement budget
Most retirees need 70% to 80% of their pre-retirement income to cover their living expenses, but your needs may be higher or lower depending on things like health care and whether you plan to work part-time. That's why it's important to create a budget for what your particular expenses might look like in retirement. It lets you estimate whether your current savings and Social Security benefits will be enough to sustain you once you leave the workforce. Make sure to make realistic projections, because although you might eliminate some of current costs, like commute expenses, you might also increase other areas, like entertainment. Don't assume your monthly spending will automatically go down.

4. Max out your retirement plan contributions
You've been contributing to your retirement accounts all along, but your 60's are a great time to take advantage of catch-up retirement plan contributions. As of 2016, anyone 50 or older can put up to $24,000 a year into a 401(k) and $6,500 a year into an IRA. And while $24,000 a year might seem out of reach, even half of that could go a long way toward helping you meet your retirement goals.

If you're able to sock away $12,000 a year for five years during your 60's, you would amass another $60,000, which, over the course of a 20-year retirement, would give you an extra $3,000 a year, or $250 a month and these figures don't even take investment growth into account. Better yet, if your employer offers to match a portion of your 401(k) contribution, you'll have even more free money coming your way to pad your nest egg.

5. Shift some assets
As you get closer to retirement, it's wise to start shifting some of your riskier investments, like stocks, into safer alternatives, like bonds. This doesn't mean that you should eliminate stocks from your portfolio completely. Dividend stocks, for example, are a great way to generate retirement income. But as retirement nears, you should look at how your assets are allocated and make sure they align with your short-term needs, anticipated post-work lifestyle, and tolerance for risk.

At every age and at every major life milestone there are financial move that make sense. Entering your 60's and nearing retirement is no exception. It's a great time to take stock of your finances and map out a financial plan for your future. A few smart moves in the handful of years before you retire could set the stage for the comfortable retirement you want.

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