As you get closer to retirement, you are undoubtedly excited yet nervous about this big change.
Will you have enough money for a comfortable lifestyle? Will you be able to travel?
The more planning that goes into retirement, the better. When you find yourself ready to retire, it's time to sit down and analyze your financial situation, attempt to estimate what your income and expenses will be, and prepare by reducing expenses where possible.
Here are some important financial steps to take as you prepare for this transition.
Decide How You Want to Live in Retirement
It may help to consider how you see your life in retirement. This will determine how much income you'll need and how much you should reduce your expenses. You may want to stop working entirely or you may be interested in a fun part-time job or even starting your own business, which can contribute to your retirement income. You may even want to spend time travelling. The goals you create for yourself will help shape the financial decisions you need to make.
Prepare a Budget
There's no way to completely determine how much money you'll need to retire or what you'll spend in retirement. Still, you can come close enough. Some expenses will go away entirely when you retire but other expenses will increase, such as medical costs. Consider your lifestyle and don't forget to include money for fun, like travelling and hobbies. While this can be difficult to do because of the impact of inflation, a retirement budget calculator can help you plan your finances.
It's usually a good idea to pay off debts before you retire. This will help you reduce your expenses in retirement. Personal loans, credit cards, and car loans can take up a much larger share of your monthly income in retirement and make it harder to put aside money for an emergency. Even if you need to use your savings, remember that paying off debt with an interest rate of 10% or more will benefit you more than the interest you earn in a savings account.
If you're going to retire soon and still have debt, tackle the debt with the highest interest rate first and be sure to stick to a budget to make this happen.
Consider Downsizing Your Home
If you have a mortgage, it may or may not be a good idea to pay it off before you retire. It can help to determine if you will stay in your current home and how you plan to use your home equity. You may decide that your home is a good fit if you need room for friends and family to stay over, you want to run a business from home, or you have other uses for the space. You may also want to remain in your home if you plan to use your home equity to make updates to age in place.
Consider your lifestyle and whether your current home will meet your needs after you retire. Do you have extra space you aren't going to use? Do you plan to travel? Will you be able to afford the mortgage, insurance, utilities, and maintenance of the house on a smaller budget? In many cases, downsizing to a smaller home or choosing a townhome or condo can make sense.
To decide if downsizing makes sense for you, consider your total housing costs, including:
From there, assess how a smaller home could save you money. Downsizing in the same area is likely to save you a good amount, but relocating to a more affordable area can help you realize even greater cost savings. Don't forget to consider the cost of selling your home and buying a new home. Even if your home is paid off, you'll need to pay closing costs and the cost to move.
Money isn't the only concern when you decide to downsize. Choosing a smaller home also allows you to plan for the future. You can choose a home that still has room for an outdoor garden, select a home without stairs, or choose a condo or townhome to eliminate home maintenance concerns as you get older.
Retirement can mean different things to different people. You may want to retire fully and travel as much as possible, spend time enjoying relaxing hobbies at home, or continue to work for a more comfortable retirement. Regardless of how you view your retirement, good planning is essential. Consider your guaranteed income, how much you have saved, and how you can reduce expenses in all areas of life to make your retirement goals a reality.