Nearing retirement can be nerve wracking and exciting at the same time.
To increase the excitement, and reduce the anxiety, as your retirement date gets closer, pay for a few major expenses ahead of time. In retirement, you experience the joy of spending your time however you choose. Unfortunately, you lose the dependable salary you’ve been used to, for your entire adult life.
If you are like most Americans who don’t have a pension, you’ll most likely rely on Social Security, your retirement plan savings, and taxable investments to provide income. As a financial planner, I often describe retirement as going from “you at work,” to “your money at work,” to provide income.
Many people underestimate the financial stress of this major shift. Of course, there are many steps to prepare for retirement, not the least of which is to develop a retirement plan with a CERTIFIED FINANCIAL PLANNER™ professional.
One step to consider in a retirement preparedness plan, to ease financial stress, is to prepay—save up or pay for—some predictable expenses that occur early in retirement.
Here are six examples of expenses to incur as you are nearing retirement:
1. Designate six months of income needs.
Consider setting aside at least six months of expenses in a stable, liquid, bank account. As a financial planner, working with clients to prepare for retirement, I have noticed common concerns. Clients with hundreds of thousands, even millions, of dollars in their retirement accounts, have asked me: “How will I pay my bills? Where will my income come from?”
To ease financial stress, retirees may want to mimic the paycheck they relied on while working. Follow these three steps:
Step 1: Set aside six months of lifestyle expenses in a designated checking or savings account – a repository account.
Step 2: Deposit any income from Social Security, pensions, part-time work, and retirement account distributions to the repository account going forward.
Step 3: Set up a monthly transfer for lifestyle spend to different checking account and use that one to pay regular household and lifestyle expenses.
These three steps can recreate a paycheck. To maintain this system going forward, be sure to replenish the repository account.
2. Pay off your credit card balances.
Pay off your credit cards before you retire. When you pay off your credit card balances each month, you don’t incur interest charges. That’s important because credit card interest rates are high. According to the Forbes Advisor weekly credit card report, as of July 13, 2024, the average credit card interest rate is 27.7%.
One way to get a handle on your debt is to set up a plan, such as Dave Ramsey’s Snowball Method, to pay off consumer debt. Once you are credit card debt free, pay off the complete balance monthly, and maximize perks, but minimize the drain of high interest charges in retirement.
3. Make home improvements.
Though you have more time to manage home improvement projects when you retire, consider making upgrades before then. Pay expenses from salary, rather than depleting assets in the first year of retirement.
If the scope of your project is larger, such as a major remodel, work with your financial advisor to determine a plan to earmark financial resources to fund your project. This may include pre-funding your project with an annual bonus, designating financial assets to sell, and/or securing a home equity line of credit.
4. Set aside your first year’s travel funds.
In my experience as a financial planner, I notice clients have a pent-up travel demand at retirement. So, it is not surprising, travel is often their top personal financial goal, since clients finally have time to travel with no time restrictions.
To enjoy travel without financial stress, set up a specific travel savings account. Fund it with at least your first year’s travel expenses in this designated account.
5. Purchase a new or late model vehicle.
Transportation is a need not a want, so it is vital to plan for a reliable vehicle in your retirement. That said, cars and trucks are a major expense. According to Kelly Blue Book, the average cost of a vehicle in January of 2024, is $47,401.
To start retirement with a low cost of transportation, consider upgrading your vehicle, either new or slightly used, a few years before you retire. Ideally, pay it off before, or at retirement.
6. Invest in equipment for hobbies.
Once you retire, you’ll finally have time to pursue your hobbies. Consider rekindling your hobby now, instead of waiting, and purchase any major pieces of equipment, while you are still working.
In retirement, you may not feel comfortable dipping into your assets for funding. Consider that your attitude toward money may change in retirement. Isn’t the purpose of retiring to spend time doing more of what you love? Set yourself up to enjoy your hobbies to the fullest in retirement.
These may seem like a lot of expenses to incur the first few years before you retire.
That’s true. Remember, however, you’ll incur these expenses sometime. You might as well fund them now. Any progress you make will be beneficial.
Imagine how relieved you will feel in retirement, when you have money in the bank for your lifestyle, and your first year’s goals. Saving ahead will help to greatly reduce financial stress in those first few years of retirement.
You’ve worked all those years for this.
Enjoy.
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