5 Years Out: Getting Prepared
Getting Ready
Ideally, the time to start planning is when you first start working full-time. When we we're young retirement is often the furthest thing from our mind. Hopefully, someone advised you to start an IRA early, but for many that is not the case. It is never too late to start saving and it is far better to start now than to wait. The Wisconsin Retirement System is one of the best in the country, but it is unlikely that it can be your only source of income in retirement.
Even if you have been a consistent saver throughout your career, it is still important to begin financial preparations 3-7 years away from retirement. There are many steps you can take to make sure you are ready when you decide to move on to bigger and better things.
Having the knowledge to make good decisions for you and your family is what I want to help you with. Below are some of the steps you can take 5 years before retirement to be better prepared.
You already know that you should avoid credit card or other high interest debt, but as you approach retirement this becomes even more important. In most cases, when you retire, your income will decrease and the last thing you will want is to pay high interest rates. 5 years out, you must focus on how you will pay down bad (high-interest) debt before you retire. Retiring with significant debt may threaten your financial well being and reduce the discretionary income for doing the things you enjoy. If you start planning for how you will address your debt at least 5 years before you retire you will be more likely to be in a better position when you stop working.
Here are some tips for paying down bad debt as quickly as possible.
Assess your mortgage
If you have a mortgage, you need to consider whether you can continue to pay it in retirement. While it is a significant advantage to have your mortgage paid off, it is not always necessary. My wife and I will be paying a small mortgage for years into retirement because we decided to use equity to buy a travel trailer. We decided that a way to travel inexpensively in retirement was more important than paying down our low rate mortgage. However, if you have a mortgage that is in its last few years, and little other debt, you may want to pay it down before you retire. If you have a large mortgage that will be impossible to pay down before retirement, consider downsizing or lowering the payments through refinancing. The other consideration as a homeowner is trying to complete expensive maintenance before you retire- for instance your roof or furnace. You also need an emergency fund that is large enough to handle major house expenses in retirement.
What will you do for Healthcare?
This is usually the most difficult obstacle blocking your path to retirement. Healthcare costs continue to rise, and so do insurance premiums. Your school district may offer some health care after your retirement- make sure you fully understand your benefits. If you have enough income, you may want to continue your district's insurance. If you are lower income, like myself, the healthcare.gov exchange is your best option. This can be a hard decision, because leaving the security of a plan you know can be a bit unsettling. For my wife and I, "Obamacare" was our only option if we wanted to retire early because of our income. The plans on healthcare.gov usually have high deductibles, but most public employees on a pension will qualify for a subsidy to help pay the premiums. With that said, I expect that our total healthcare costs will be at least $12,000 a year. It is critical that you are prepared for this substantial cost in retirement. Each year, I preview prices on healthcare.gov to get a feel for what I might expect, and so should you.
Big Ticket Items
5-10 years before retirement, you should consider if there are home repairs, or the need for a new car, so you can have these paid off before you retire. If you know your car won't last more than 3-5 more years, consider buying one now and getting it paid off before you retire. This also true with house repairs. If you know you need new windows or a furnace, do them before you retire.
One "big ticket" we did before early retirement was putting a new roof and solar panels on. Solar panels, if paid off before retirement, can be considered an investment against future rising energy costs. We also bought an electric car, and by pairing solar and the EV together, we are not at the mercy of high gas prices if we want to travel. Click here to learn about green investments.
Early Retirement cash
If you are retiring before 59 1/2, you will not be able to access your IRA's without significant penalty so you will need a more traditional savings account. We actually stopped contributing to our IRA to save cash for the first few years of retirement. You also need emergency cash in case you have an unexpected home or auto repair. It is much easier to stockpile cash if you start 3-4 years before retirement. In your last year, you may not need to save for summer, because your pension will begin July 1, so that may making saving easier. We wanted a significant sum of money for home repairs and to be able to pay for health care deductibles when we started on Obamacare. It is imperative that you think about what amount will make you feel secure retiring early.
Working part-time is a great way to supplement your income if you are short on savings. It is also important mentally and socially, to stay active. Have you considered what type of work might you do? Substitute teaching is a natural, but some retirees may not want to go back to school in that role.
What else can you do? You should start thinking about this early on to prepare for finding something that you really WANT to do. You also should consider how much income you might need, and whether you want a regular part-time job with a set schedule, or gig work that is more flexible. I started working part-time about one year before my date, and it gave me the confidence that I could generate income by doing something other than teaching. Another great advantage of starting to work part-time before I retired was making more cash available for savings.