Retiring This Year? Do This Before Your Paychecks Stop
Preparing for retirement can come with a lot of tasks, stress and excitement. Multiple decades of earning paychecks and saving money have all led to this moment.
If your last day of work is coming up, you only have a few months left to put yourself in a better position to cover living expenses after your paychecks go away. Here are three moves to make now.
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1. Determine what income will replace your paycheck
It’s essential to understand how much you have to spend each month to maintain your lifestyle — or the lifestyle you wish to have in retirement, which could include more travel and new hobbies. Social Security benefits can cover some of those costs, but that program isn’t designed to cover all of your expenses. You will need other income sources like retirement savings accounts withdrawals, cash savings, taxable investment accounts and possibly some gig work to fully replace your paychecks.
Keep in mind that your income may not arrive the moment you leave your job. If you apply for Social Security after retiring, it will need some time to process.
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2. Turn savings into a spending plan before you leave work
While retirees often have some guaranteed income sources that can make monthly expenses easier to cover, you will need monthly cash flow that can make up the difference if there are any gaps. A cash cushion that can cover up to a year or two of living expenses helps and makes it easier to stay invested in the stock market.
If you have multiple retirement accounts — such as traditional, Roth and taxable brokerage accounts — you will have to map out which ones you withdraw from first. Roth accounts offer tax-free withdrawals, while traditional individual retirement accounts (IRA)s and 401(k)s will eventually have required minimum distributions. Taxable brokerage accounts incur taxes for capital gains and dividends.
A tax professional or financial advisor can help you create a plan so you know how to access funds from each of those accounts. If you are still on a payroll, you have a few more months to boost your savings and max out your retirement account contributions.
3. Prepare for taxes and health care costs
Taxes can catch some people by surprise. You can minimize tax surprises by requesting that Social Security withhold a portion of each check for taxes. However, health care costs are often another big shock for retirees who run into health issues. It’s important to plan for these expenses and determine what health insurance you can use. Medicare, retiree health coverage, COBRA, a spouse’s plan or Affordable Care Act coverage are some of the most common options.
You can enroll in Medicare beginning three months before you turn 65. The initial enrollment period lasts seven months, and missing Medicare deadlines can lead to coverage gaps or penalties. Near retirees should also account for premiums, deductibles, future long-term care needs and other health costs right before they retire.
Planning helps ensure you don’t hit major financial speed bumps when you retire. And having a solid first year of retirement can make the future ones easier.