Every day, approximately 10,000 Americans reach the age of 65, signaling their readiness to retire. While each individual’s financial circumstances vary, it is evident that millions of people are preparing for retirement in 2023. Retirement can offer exciting opportunities such as travel, hobbies, and family time, but it can also be overwhelming due to financial considerations.
According to U.S. government data, the average retiree household spends $52,141 annually, and surveys indicate that Americans expect to accumulate $1.25 million for a comfortable retirement. Here are three financial moves you need to make to ensure a smooth transition into retirement:
#1 Understand your budget:
One crucial aspect to address before retirement is knowing your regular expenses. Barbara Pietrangelo, chair at Life Happens, a nonprofit organization focused on life insurance education, emphasizes the importance of answering this question, particularly when transitioning to a fixed income. Calculate your retirement expenses by reviewing your credit card and bank statements for six months to a year. Consider living within that income for a few months to better understand your financial situation. This exercise not only helps you track your spending but also assists in setting realistic goals.
Assess your income sources, such as Social Security and pension, and plan how you intend to spend your time during retirement. Pietrangelo advises evaluating your expenses to ensure you have enough funds for your desired activities. Determine non-negotiable costs, such as water bills, property taxes, and car insurance, and identify areas where you can potentially reduce spending, such as eating out, shopping, or streaming subscriptions. Additionally, consider downsizing, relocating, or exploring part-time job opportunities based on your needs and preferences.
#2 Prioritize savings:
Ideally, entering retirement with little or no debt is favorable. Therefore, focus on paying off any remaining balances as soon as possible. Once your debts are under control, Chad Willardson, the founder, and president of Pacific Capital, recommends maximizing your contributions to retirement accounts. Upon reaching 50 years of age, you will be able to make catch-up contributions, allowing you to save up to $30,000 in a 401(k) or 403(b) and up to $7,500 in an individual retirement account (IRA) in 2023. However, it is essential to actively manage your investments and ensure your portfolio is properly diversified and aligned with your risk tolerance.
To reach your retirement goals, you should consult a financial advisor. Additionally, establishing an emergency fund is crucial. This fund is a safety net to cover unforeseen expenses like car repairs, pet care, or home maintenance. Strive to save six months’ worth of expenses and consider placing the funds in a high-yield savings account to increase your financial security and earn interest.
#3 Prioritize your health:
Healthcare expenses can significantly impact your retirement finances. To cover medical expenses during retirement, the average 65-year-old couple needs approximately $315,000 in after-tax savings. Therefore, it is wise to schedule regular check-ups with your doctor and dentist before retiring. Start planning ways to maintain your physical and mental well-being during retirement, such as joining a gym, exploring new sports, or hiring a personal trainer. From a financial perspective, it is crucial to understand your Medicare options and potential out-of-pocket costs.
Assess whether Medicare supplement insurance or long-term care insurance is necessary and allocate a portion of your retirement budget for prescriptions. While focusing on your health, review your estate plan as well. Pietrangelo recommends organizing all your important documents, like your will and health care directive, in a booklet and informing your family where to locate it. Verify your beneficiaries and consult with an estate planning attorney to ensure the completeness and effectiveness of your estate plan. Knowing that your financial and healthcare matters are well taken care of can bring you peace of mind as you approach retirement.
In summary, as you prepare to retire in 2023, it’s essential to prioritize your financial well-being. Understand your budget by analyzing your expenses and income sources, make necessary adjustments, and consider downsizing or part-time work if needed. Prioritize savings by paying off debts, maximizing contributions to retirement accounts, and establishing an emergency fund. Lastly, prioritize your health by scheduling check-ups, staying active, and understanding your healthcare options and costs. Reviewing your estate plan and communicating important details to your loved ones further enhances your retirement readiness. These three key steps can set you up for a fulfilling and financially secure retirement in 2023.