As individuals approach retirement, it’s crucial to adopt a proactive approach to financial planning. The transition from a steady income to living off savings and investments requires careful preparation to ensure financial security throughout one’s golden years. Josiah Grauso of Poconos will offer insights into the key financial steps pre-retirees should take, including adjusting investment strategies and budgeting for healthcare costs.
1. Reassessing Your Investment Strategy
One of the most critical financial considerations for pre-retirees is adjusting their investment strategy. Josiah Grauso explains that during the accumulation phase, which spans most of a person’s working life, the primary goal is to grow wealth. However, as retirement approaches, this focus shifts from growth to preservation and income generation.
• Shift from Growth to Income-Generating Investments:
Pre-retirees should consider shifting a portion of their portfolio from high-risk, high-reward investments like stocks to more stable, income-generating options such as bonds, dividend-paying stocks, or annuities. This transition can help reduce exposure to market volatility, which can be particularly damaging in the years leading up to and immediately following retirement, a period often referred to as the “retirement red zone.”
• Diversification is Key:
Maintaining a diversified portfolio remains essential even as one transitions to a more conservative investment strategy. Diversification helps manage risk by spreading investments across various asset classes. Pre-retirees should work with a financial advisor to rebalance their portfolio, ensuring that it will align with their risk tolerance and income needs throughout retirement.
2. Understanding and Budgeting for Healthcare Costs
Healthcare is often one of the most significant expenses in retirement. According to a study by Fidelity Investments, a 65-year-old couple retiring in 2023 can expect to spend an average of $315,000 on healthcare expenses throughout retirement. Josiah Grauso understands that this figure underscores the importance of planning for healthcare costs as part of any retirement strategy.
• Plan for Medicare and Supplemental Insurance:
While Medicare provides a base level of coverage for retirees aged 65 and older, it does not cover everything. There are costs associated with Medicare premiums, deductibles, co-pays, and services not covered, such as dental, vision, and hearing care. Many retirees opt for supplemental insurance, such as Medigap or Medicare Advantage plans, to cover these additional expenses. Pre-retirees should evaluate these options and budget accordingly.
• Long-Term Care Insurance:
Long-term care (LTC) insurance is another important consideration. LTC insurance helps cover the costs of services such as nursing homes, assisted living, or in-home care, which are typically not covered by Medicare. The costs of long-term care can be substantial, and LTC insurance can provide a safety net that protects retirement savings from being depleted by these expenses. It’s best to purchase LTC insurance in your late 50s or early 60s when premiums are more affordable and you are more likely to qualify for coverage.
3. Developing a Realistic Retirement Budget
A realistic budget is a cornerstone of a secure retirement. Josiah Grauso emphasizes that it’s important for pre-retirees to assess their expected income sources and expenses in order to develop a budget that reflects their anticipated retirement lifestyle.
• Calculate Your Income Sources:
Identify all potential sources of retirement income, including Social Security benefits, pension payments, retirement accounts (such as 401(k) or IRA distributions), rental income, and part-time work. Understanding the timing and amount of income from these sources is essential for developing a retirement budget.
• Estimate Your Expenses:
Next, estimate your expected expenses. Start with essential costs such as housing, food, utilities, transportation, insurance, and healthcare. Then, consider discretionary expenses like travel, entertainment, hobbies, and dining out. It’s also wise to factor in potential unexpected costs, such as home repairs or emergency medical expenses.
• Adjust for Inflation:
When planning your budget, don’t forget to adjust for inflation. Even moderate inflation can erode purchasing power over time. Consider using a conservative inflation rate (such as 2-3% annually) when projecting your future expenses to ensure your savings will be sufficient to maintain your desired lifestyle throughout retirement.
4. Maximizing Social Security Benefits
Social Security is a critical source of income for many retirees. The timing of when you start receiving Social Security benefits may significantly impact the amount you receive. Pre-retirees should understand their options and plan accordingly to maximize their benefits.
• Understand Your Full Retirement Age (FRA):
Your FRA is the age at which you are entitled to receive your full Social Security benefit. For most people, this age is between 66 and 67, depending on their birth year. If you start taking benefits before your FRA, your benefits will be reduced. Conversely, delaying benefits beyond your FRA until age 70 can increase your monthly benefit amount by 8% per year.
• Consider Spousal and Survivor Benefits:
If you are married, you may be eligible for spousal or survivor benefits, which could provide additional income. Spousal benefits are available if one spouse did not work or earned significantly less than the other. Survivor benefits can provide continued income if one spouse passes away. Understanding these options can help maximize household Social Security benefits.
5. Managing Debt Before Retirement
Carrying debt into retirement can significantly impact your financial security, as it reduces the amount of income available for living expenses. Josiah Grauso of Poconos explains that pre-retirees should aim to pay off high-interest debt, such as credit cards, and consider strategies for managing or eliminating other debts, such as mortgages or car loans.
• Prioritize High-Interest Debt:
Focus on paying off high-interest debt first, as it accrues the most significant amount of interest over time. Reducing or eliminating these debts can free up more money for savings and reduce financial stress in retirement.
• Evaluate Mortgage Options:
If you still have a mortgage, consider whether it makes sense to pay it off before retirement. This decision will depend on your interest rate, remaining loan term, and overall financial situation. Some retirees prefer the peace of mind of being mortgage-free, while others may choose to keep a low-interest mortgage and preserve cash for other investments or expenses.
6. Consider Downsizing or Relocating
Housing is often one of the most significant expenses in retirement. Pre-retirees might consider downsizing to a smaller, more manageable home or relocating to an area with a lower cost of living. Josiah Grauso explains that these moves can reduce housing costs, freeing up additional funds for other retirement expenses.
• Downsizing Benefits:
Downsizing to a smaller home can reduce maintenance and utility costs and may allow retirees to access home equity for other purposes. Additionally, moving to a retirement-friendly community can offer social opportunities and amenities that significantly enhance the quality of life.
• Relocating to a Lower Cost Area:
Relocating to a region with a lower cost of living can stretch retirement savings further. Consider factors such as state taxes, healthcare availability, climate, and proximity to family when evaluating potential relocation destinations.
Navigating the transition to retirement requires careful planning and consideration of several financial factors. Josiah Grauso of Poconos emphasizes that by adjusting investment strategies, budgeting for healthcare costs, developing a realistic budget, maximizing Social Security benefits, managing debt, and considering housing options, pre-retirees can position themselves for a financially secure and fulfilling retirement. It’s always advisable to consult with a financial advisor to tailor these strategies to your specific circumstances and goals.
Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and ASC Financial Group are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.
