If you’re planning to retire anytime in 2027, it’s a good idea to start honing in on your financial plans now. Even if your retirement is only a few months away—like, say, December next year—it’s really important to be ready for that big life change. Feeling prepared and confident when stepping into retirement can make all the difference.
Here are three key steps to take before retiring in 2027 that could help you cover all your bases.
1. Create a comprehensive budget
Many people think their expenses will decrease once they retire. While it’s possible that your costs might drop if, for instance, you’ve paid off your mortgage and you won’t have a daily commute, it’s also likely that some expenses could increase. You might find yourself paying more for healthcare premiums after joining Medicare, or you could be spending significant sums on hobbies or travel.
This is why crafting a detailed budget is absolutely essential. It allows you to see what your annual spending will actually look like. Your budget should encompass everything—from property taxes to auto insurance, and yes, even those smaller purchases you make regularly.
Moreover, it’s wise to ensure your budget has a cushion for unexpected expenses. Just because you’re retired doesn’t mean there won’t be surprise costs—like a car repair or needing to buy a new appliance. Planning for these potential expenses will help you handle any unexpected financial bumps along the way.
2. Figure out a Social Security filing strategy
For those with substantial retirement savings, Social Security might not be as crucial for your monthly income. However, if your retirement savings are more limited, you might find yourself relying more on Social Security to cover your living costs.
It’s crucial to evaluate how much you can expect to receive from Social Security, which largely depends on when you decide to file. The earliest you can start receiving benefits is age 62, but if you want to avoid any reductions, you will need to wait until your full retirement age, which is 67 for those born in 1960 or later.
Additionally, delaying your Social Security benefits beyond full retirement age could yield larger monthly checks. Each year of delay translates to a permanent 8% increase, up until age 70. If you anticipate living for many years and you’re concerned about exhausting your retirement accounts, waiting to claim Social Security might offer added security.
3. Stress-test your income plan against inflation and a stock market crash
Even with a well-thought-out spending and income strategy, unpredictable events can arise and disrupt your plans. It’s important to account for these possibilities and ensure your financial strategies hold up.
Inflation is a consistent concern for retirees. Over time, general costs tend to rise, which can erode your savings and spending power.
The positive side is that Social Security benefits include cost-of-living adjustments tied directly to inflation. You can also actively protect your savings from inflation by maintaining a solid stock allocation in your portfolio.
A stock market downturn is another situation you should prepare for. If the market crashes while you’re relying on your investments for income, you could experience significant losses. It’s smart to have a cash reserve that covers one to three years’ worth of living expenses, allowing you to avoid liquidating your investments during unfavorable market conditions.
Reducing spending during a market downturn can also be beneficial. You might want to create a worst-case scenario budget that differs from your main one. This secondary budget could outline a more frugal lifestyle, which you might need to adopt temporarily if the market swing is prolonged and your financial cushion shrinks.
The more proactive you are in your retirement preparations, the more at ease you may feel about wrapping up your career. By addressing these critical steps, you can minimize any lingering worries by the time you’re ready to move on from your job.
