Preparing for Retirement...Start Early

In 2012 I compiled a listing of seven retirement planning tips.  These tips were intended for people to undertake prior to entering retirement, preferably within ten years of retirement.  Some of these may be helpful for recently retired individuals who may not have done sufficient planning.  Here are the seven tips in case you have forgotten or missed them:

·       Get a handle on your expected spending in retirement.

·       Eliminate credit card debt and bring other debt under control.

·       Educate yourself about when to claim Social Security benefits (especially if you have a spouse).

·       Set and maintain a retirement spending rate (withdrawal rate).

·       Plan for increased health care costs.

·       Plan to cope with market volatility.

·       Hire a fee only financial planner to help you look at the whole picture if you are not comfortable doing it yourself.

These steps are as important today as they were in 2012.  This posting is intended to expand on some of the above and add a few more.

I inadvertently omitted a very important tip from the original list, and that is to know what you will be doing in retirement.  Today it is not unusual for people to spend 20 to 30 years or more in retirement.  You should have specific ideas as to how you will spend your time in retirement before you stop working.  Playing golf is not a reasonable plan unless you are a touring pro.  The founder of a successful company that I used to work for told me that he planned to work as long as he could, and added that he would rather work than do anything else.  To the best of my knowledge he is still working today in his eighties.  If you are like him you should not plan to retire as you will never be as happy as you are working.

Most of us who do not wish to work forever have other aspirations.  Whether it is charitable work, volunteering, starting a new business (a different kind of work), taking up a hobby or writing a book, you need to make a plan.

Books have been written about when and how to claim Social Security benefits.  It is common for claimants not to understand the importance of knowing when and how to claim especially if there is a spouse.  Social Security is a lifetime government pension and a very important component of retirement planning.  It provides a lifetime income adjusted for inflation, and for many people their largest source of income in retirement.  Failure to properly plan to maximize your lifetime Social Security benefits can result in losing thousands of dollars for you and your spouse.  Forget what you have heard about the program going broke or being non-existent when you are ready to retire.  Social Security will continue to be modified to make it more financially stable with more means testing and other changes (extension of retirement age, etc.), but will be there in some form for those of us working today.

I am often asked if one should pay off his or her mortgage prior to retiring.  The short answer is yes; however, it is not always possible.  You should not delay your retirement just to pay off a mortgage as there are ways to retire and continue to carry a mortgage.  One solution may be to refinance to lower your costs or to shorten the remaining time on the mortgage.  It may be possible to pay an extra amount each month against the principal while you are working to shorten the life of the mortgage without refinancing and incurring closing costs (see blog posting of April 2, 2012: How to Reduce Interest Costs and Pay Off Your Mortgage Faster). 

Retirement planning is not something that can be done at the last minute.  Thinking about retirement should start when you begin working, strange as it sounds, but that is when you can begin implementing the most valuable planning tip of all: 

“Start saving as much as you can as early as you can.”