What Should I Do 2 Years Before Retirement?

Preparing for retirement involves more than setting a date; it requires a strategic approach. The two-year mark before retirement is an important period for planning. This timeframe allows individuals to make meaningful adjustments to financial and personal strategies without immediate pressure. Proactive steps taken during this phase contribute to a smoother transition into retirement.

Assessing Your Financial Landscape

Understanding your current financial standing is key to retirement planning. Begin by calculating your net worth, listing assets and liabilities. Assets include savings accounts, investment portfolios (e.g., 401(k)s, IRAs), real estate equity, and other valuable possessions. Compile all liabilities, including mortgage balances, credit card debt, personal loans, and vehicle loans.

Next, project your anticipated expenses in retirement. Essential expenses include housing costs (e.g., property taxes, maintenance), utilities, food, transportation, and healthcare premiums. Discretionary spending includes travel, hobbies, entertainment, and dining out. Consider potential lifestyle changes, such as reduced commuting costs or increased travel, and factor in inflation.

Review your current and projected income streams. This includes current salary, potential part-time income, and preliminary Social Security estimates. The Social Security Administration (SSA) offers online tools to estimate future benefits based on your earnings record. If you have a pension, contact your plan administrator to understand payouts.

Comparing projected retirement expenses with anticipated income streams allows for a gap analysis. This comparison identifies shortfalls requiring savings or spending adjustments, or surpluses offering financial flexibility.

Optimizing Retirement Income and Investments

Strategic adjustments to income and investment strategies follow a clear understanding of your financial landscape. Reviewing your investment portfolio is important during this two-year window. As retirement approaches, many individuals consider de-risking or rebalancing their portfolios by shifting from higher-risk growth assets (e.g., stocks) to more conservative, income-generating assets (e.g., bonds, dividends). This protects capital while allowing for some growth.

Deciding when to claim Social Security benefits is an important financial decision with long-term implications. Full Retirement Age (FRA), the age for 100% of your primary benefit, varies by birth year (e.g., 66 years 10 months for 1959, 67 for 1960+). Claiming benefits early, as soon as age 62, results in a permanent reduction in monthly payments, while delaying benefits past your FRA, up to age 70, can increase your monthly payout through delayed retirement credits. These credits add about 8% per year to your benefit for each year delayed until age 70. Using the Social Security Administration’s online tools can help model different claiming scenarios.

For individuals with pensions, understanding the available payout options is important. Common choices include a lump sum distribution or various annuity options. A lump sum provides a single payment, while an annuity offers guaranteed regular payments for a set period or life. Annuity options often include survivor benefits. Evaluate the tax implications and income security of each choice, consulting with the plan administrator for information.

Tax planning for retirement income is another important consideration. Different retirement accounts have distinct tax treatments: traditional 401(k)s and IRAs are pre-tax, offering deductions and tax-deferred growth, but withdrawals are taxed as ordinary income. Roth accounts (e.g., Roth IRAs, Roth 401(k)s) are after-tax, with tax-free withdrawals. Required Minimum Distributions (RMDs) from traditional tax-deferred accounts begin at age 73, or age 75. Roth IRAs do not have RMDs for the original owner.

Considering a Roth conversion involves moving funds from a traditional tax-deferred account to a Roth account, triggering income tax in the conversion year. This strategy benefits those anticipating a higher tax bracket in retirement, as future qualified Roth withdrawals are tax-free. A five-year rule applies to Roth conversions: converted funds must remain in the Roth IRA for at least five years before tax-free withdrawals, especially if under age 59 ½.

Managing existing debt is a prudent financial step before retirement. Prioritizing the repayment of high-interest debt frees up cash flow in retirement. Paying down or eliminating a mortgage before retirement reduces fixed monthly expenses, providing financial flexibility.

Planning for Healthcare and Insurance

Healthcare costs represent a significant expense in retirement. Understanding Medicare is a key component of this planning. Medicare Part A covers inpatient hospital stays, skilled nursing facility care, hospice care, and some home health services. Part A is premium-free for most individuals who paid Medicare taxes. Medicare Part B covers doctor visits, outpatient care, preventive services, and some medical equipment; it involves a monthly premium and an annual deductible.

Medicare Part D provides prescription drug coverage. Medicare Advantage Plans combine Part A and Part B coverage, often including Part D and additional benefits like vision or dental care. The Initial Enrollment Period for Medicare begins three months before your 65th birthday, includes your birthday month and the three months after, a seven-month window. Enrolling during this period helps avoid potential late enrollment penalties, which can result in higher premiums.

Beyond Original Medicare (Parts A and B), many retirees consider supplemental insurance. Medicare Supplement (Medigap) plans work alongside Original Medicare to pay for out-of-pocket expenses. You cannot have both a Medigap plan and a Medicare Advantage plan simultaneously. Medigap plans offer more flexibility in choosing healthcare providers, while Medicare Advantage plans often have lower premiums but may restrict provider choices.

Long-term care planning is another important aspect, given the substantial costs of services like in-home care, assisted living, or nursing homes. While long-term care insurance is an option, premiums can be substantial and may increase over time. Alternatively, some individuals choose to self-fund long-term care needs through personal savings. Reviewing other insurance policies is advisable to determine if they remain necessary or need adjustments.

Addressing Non-Financial Preparedness

Retirement planning extends beyond financial considerations to lifestyle and well-being. Planning how you will spend your time is important for a fulfilling retirement. This involves dedicating time to hobbies, volunteer work, education, or travel. Some individuals may even consider a part-time “encore” career, which can provide purpose and supplemental income.

Maintaining and building social connections is a significant aspect of non-financial preparedness. Work often provides a natural social outlet, and its absence can lead to isolation if not addressed. Joining clubs, groups, or volunteer organizations, or nurturing existing friendships, can ensure a strong social network in retirement.

Consideration of your living arrangements is another practical step. This could involve downsizing to a smaller home to reduce expenses and maintenance, relocating to an area with a lower cost of living or closer to family, or making modifications to your current home to facilitate aging in place. Evaluating property taxes, insurance costs, and maintenance needs in potential new locations is important.

Review or establish estate planning documents. This includes wills for asset distribution and trusts for asset management and probate avoidance. Durable powers of attorney for financial matters and healthcare directives ensure your wishes are honored if you become incapacitated. Confirm that beneficiary designations on retirement accounts and life insurance policies are current and align with your estate plan.

Finally, open communication with family members about your retirement plans is beneficial. Discussing financial intentions, healthcare wishes, and future support needs can prevent misunderstandings and ensure your family is aware of your plans and preferences. These discussions contribute to a smoother transition into retirement.