Yahoo Finance Ready To Retire? 6 Ways To Have a Smooth Financial Transition
Retiring is not only a major accomplishment, it’s also a huge change for your lifestyle and your finances. You’ll have more time to relax, travel and visit family, but the tradeoff is that you’ll no longer have a steady paycheck for your employer.
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As you can imagine, retirement can be a big shock to your finances if you aren’t prepared. So if you’re nearing retirement age, it’s time to take these steps and ensure the transition is a smooth one financially.
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Get a Sense of Your Cash Flow
The key to financially preparing for retirement is understanding and planning your cash flow, according to Carla Adams, founder and financial advisor at Ametrine Wealth.
“We all get so used to having a regular paycheck — whether it be biweekly, monthly, etc. — and the thought of suddenly NOT having a paycheck is really unsettling to people,” she said.
So if you’re nearing retirement, it’s important to get a handle on your spending needs and determine whether your income will be able to support them. That means tallying up all of the income sources you’ll have in retirement and then subtracting all of your expenses. The result is your monthly cash flow, which is hopefully a positive number. If not, you’ll need to identify areas of your budget where you can cut back.
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Consider Your Ideal Lifestyle
Just because you’re leaving the traditional employment world behind doesn’t mean you have to check out completely. Not only does maintaining a job in retirement help pad your income, but it provides a sense of purpose and mental stimulation.
“For many, retirement is an opportunity for a second act. Volunteer, learn a new skill, launch a small business — all things that keep people engaged,” said Erin Wood, CFP, senior vice president of financial planning at Carson Group.
That’s why she always encourages her clients to retire to something, not from something, whether it’s a new vocation or avocation. Wood recommends that at least five years before retirement you start thinking about what your days will look like when you’re no longer working full time. Then, test-drive your planned activities to ensure you actually enjoy them.
Re-Evaluate Your Investments
As you near retirement, it’s important to adjust your investments so that you’re taking on less risk and setting yourself up for ongoing investment income.
Wood said today’s high-rate environment is a particularly good time to re-evaluate your overall investment allocation leading up to retirement and determine how cash holdings fit into the plan, as it has been nearly 20 years since deposit accounts have paid this high.
“Clients who are more conservative or have large cash holdings should be taking advantage of the high APR,” Wood said. “This will allow them to build a bigger cushion for retirement by getting the needed overall investment return and taking less risk than required in previous years, leading to a smoother transition.”
Focus on Eliminating Debt
Having your investments dialed in is key. But it’s also crucial that interest from debt isn’t eating into your returns and the payments aren’t reducing your cash flow. That’s especially true for high-interest consumer debt, such as credit cards.
“Think through your overall debt load and how you can bring it down before retiring,” said Sri Reddy, senior vice president of retirement and income solutions at Principal Financial Group. “If you can figure out how to be debt-free and mortgage-free, you’re going to have a roaring head start in retirement.”
Have a Plan for Healthcare
“You will leave behind all your employer benefits when you leave the workforce, so it’s important to have a plan in place to prevent lapses in coverage,” said Michael Simon, CEO at NDVR, a wealth management firm. “The first item to confirm is when your benefits expire. Some may end the day you are done working while others may extend through the end of the month you retire.”
As soon as you start thinking about retiring, start evaluating and planning for healthcare in retirement, including any gaps in coverage until becoming eligible for Medicare (if you plan to retire before the age of 65).
Prepare Emotionally
Money and mental health often go hand in hand. When your finances are in good shape and you feel confident in your money management skills, you tend to have a brighter outlook on life in general. Similarly, if you feel content and fulfilled in your life, you can make more rational and forward-thinking financial decisions.
So don’t overlook the importance of preparing emotionally and mentally for retirement.
“Transitioning from a full-time career to retirement can be an emotional identity shift,” Simon said. “It can be difficult for some to find purpose beyond a professional role, and expectations for what retirement will look like may not align with reality.”
If that’s the case, know that it’s OK. Acknowledge your feelings, and consider enlisting the help of a counselor. Simon said it can also help to speak with friends who have already retired.
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This article originally appeared on GOBankingRates.com: Ready To Retire? 6 Ways To Have a Smooth Financial Transition
