Not long ago I came across a link to an old David Letterman Top Ten List, called “Top Ten Reason I’m Glad To Be Named Justin Bieber.” They found a guy from Florida who had the same name as the famous kid singer Justin Bieber, flew him up to New York and let him read the 10 jokes they came up with for the list. If you can find it online it’s pretty funny.
The Top 10 Ten List was Letterman’s thing. After Stephen Colbert took over it was dropped (or so they say, I don’t watch Colbert).
- Contribute to retirement accounts – These include 401k’s, IRA’s, 403b’s, Roth IRA’s, etc. If you have access to contribute to a 401k you can add a good bit to those each year. If it’s a Roth 401k that’ll all be tax-free when you retire. If it’s traditional 401k (or traditional IRA) you’ll pay tax on it later when you make distributions. But getting the funds inside retirement accounts is very important. Even inside a traditional 401k, you’ll at least have the option to convert those funds to a Roth IRA at a later date.
- Pay off debt – Paying off debt helps to reduce the fixed expense hurdle you have to jump over every month. What this means for retirement is that it will put less stress on your portfolio to sustain withdrawals to cover the expenses that your Social Security is not large enough to cover.
- Take a life expectancy quiz – Better yet take 2. This will give you an idea of how long you are likely to live, and hence give you a better idea of how much in savings you will need. Also, it will help you have a better idea of when to begin drawing Social Security. The longer you expect to live the more it benefits you to delay your Social Security so you get a larger payment.
- Calculate your reliable income sources – For most people this will include Social Security. You can increase your Social Security income by delaying it up to age 70 if you want. You may have other reliable sources of income, such as a pension. Or maybe you’d like more guaranteed sources of income, then you could consider buying an annuity. One important thing about annuities, some will start building up their income guarantees over time. So if you are wanting to retire in 5 years, you may want to begin looking today and setting money aside in an annuity that will guarantee you income in 5 years when you retire. Usually you can get a higher guaranteed income that way, as opposed to waiting until you are about to retire to buy an annuity.
- Calculate your monthly expenses for retirement – They’ll change when you retire. So try to imagine what they could be at that time, which may be 5-10 years in the future. Will you still have a mortgage? Will you have car payments? Also, imagine what you want to do in retirement (travel, pursue a hobby, buy a boat, motorhome, 5th wheel, etc) and think about what that will cost to do.
- Take inventory of your assets – You will use these to fund your lifestyle once your paycheck goes away (unless you are one of the few that can get by on Social Security alone). So it is good to calculate all your assets. You could use a simple Excel spreadsheet to aggregate all your savings. Or you could make a simple 3-ring binder to store all your monthly statement with one master sheet that shows what they all add up to.
- Diversify your investments – A lot of people are still making the same asset allocated contributions to their 401k account that the initially were doing 20 years ago when they first were hired by their present employer. Your portfolio should be in line with your goals, risk tolerance, time horizon, and time until you plan on retiring. Diversifying your portfolio is very important as you near the time when you will be dependent on making withdrawals from it to sustain you in retirement.
- Begin (or add to) an emergency fund – When you are working a 6 month emergency cash fund is sufficient for most people. That’s 6 months of your living expenses sitting in cash. When you retire it’s better to have at least a 12 month emergency cash fund.
- Make sure you have your health insurance lined up – If you work for a large employer you probably are on a group health insurance plan. Before you retire make sure you have a good option for affordable health insurance. The health insurance challenge is what causes a lot of people to wait until they are 65, eligible for Medicare, before they retire. But your employer may offer retiree health insurance before you reach age 65 that is reasonably priced.
- Begin reducing the “tax lien” Uncle Sam has on your IRA’s – You may be in a position where it makes sense to convert some of your IRA’s to Roth IRA’s. This means paying the income tax on a portion of your IRA funds. When you convert to a Roth IRA the funds are in a tax-free environment. This can be important because some people will have large IRA’s that can potentially require large required minimum distributions when they turn 70 ½. If that is the case it may cause other retirement income to be affected by the income that is produced through the distributions. This can affect the taxation on your Social Security benefits as well.
Not quite as funny as Letterman, but infinitely more helpful when you’re planning for retirement.
– Chris Hammond