3 Steps to Take Now If You Want To Retire in 2-3 years

August 17, 2023 | David Edmisten, CFP®

Are you thinking about retiring in the next couple of years? Here are 3 steps to take now to get ready for retirement.

1. Develop a retirement spending budget

To truly be ready for retirement, you need to have a clear idea of what you will spend each year. A simple way to develop your budget is to start by looking at your current monthly expenses.

Subtract work related costs that will disappear at retirement.  This will include your normal contributions to retirement savings accounts, and other automated savings from your paycheck.  You'll also want to subtract your employee paid premiums for benefits, commuting expenses, dry cleaning, additional meals and any other costs related to work that will no longer be needed when you retire.

Then add in new expenses you expect in retirement – such as additional leisure, club memberships, and hobbies.  You'll want to add in costs for specific items - such as HOA dues, insurance or loan payments for an RV or boat, and additional travel costs if you expect to travel more for pleasure or visiting loved ones.  You may also want to build in temporary costs, such as relocation expenses, into your first-year budget to make sure you haven't missed anything.  This should give you a good starting point to estimate the monthly income you’ll need in retirement.

2. Build up a cash savings account of 12-24 months of retirement living expenses.

Having a cash reserve of 1-2 years of living expenses allows you to enter retirement confidently. You’ll already have the cash set aside to cover all of your yearly retirement expenses for the first year or two before you retire. You won’t have to worry about a bad stock market or other economic changes throwing your plans off course. You can allow your investments time to adjust if conditions are bad and store up any growth or income from your nest egg for future spending.

You can plan to set up a recurring monthly withdrawal from your cash reserve to your checking account once you enter retirement, so the funds are ready to spend when you need them.

3. Max out your savings for retirement

The last years of your career are a great time to accelerate your savings for retirement. Use higher income and bonuses to make larger contributions to your investments.  Contribution limits for 401k and similar workplace retirement savings plans increased to $22,500 in 2023. IRA contribution limits increase to $6,500 as well.

If you are age 50 or over, you can take advantage of catch-up contributions to your 401k and IRA accounts to save thousands more.  Catch-up contributions for a 401k plan increased to $7,500 in 2023 and you can add a catch-up contribution of $1,000 to your IRA, if eligible, for even more retirement savings.

Another overlooked way to increase your retirement savings in a tax-smart way is to maximize your Health Savings Account.

Health Savings Accounts (HSAs) are available only to those who choose high-deductible health insurance plans (HDHPs). If you participate in an HDHP and you have access to an HSA, this can be a powerful vehicle for building tax-advantaged savings for retirement.

To understand the benefits that an HSA provides for retirement, keep in mind:

• The money is not taxed before you pay it in.

• The interest and earnings on the money are not taxed.

• Withdrawals are not taxed if used for allowable medical expenses.

While many people use the balances in their HSA accounts for current medical costs, there is a significant benefit by saving these funds for retirement.

The balance in the HSA account grows tax-free and can be invested to provide higher rates of growth. Since the deposits, growth and withdrawals can be tax-free if done correctly, this is the most powerful tax-advantaged account.

Also, contribution limits for an HSA account are relatively high. Individuals can contribute up to $3850 to an HSA in 2023, and up to $7,750 for a family plan. If you're 55 or older, you can make an extra "catch-up" contribution of $1,000 per year and a spouse who is 55 or older can do the same if each of you has your own HSA account.

You can also contribute to an HSA account regardless of your income.

Keep in mind that withdrawals taken from an HSA for other expenses are subject to income tax and a 20% penalty if taken prior to age 65. It’s important to plan carefully and follow the rules to get the most benefit from your HSA account.

By setting an accurate retirement budget, building a cash reserve for the first years of retirement spending, and maxing out your retirement savings opportunities, you can use the final years of your career to boost your nest egg and make it easier to retire with confidence.

If you'd like help reviewing your retirement readiness, Schedule a Call with us for a complimentary assessment.

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About the Author:

David Edmisten, CFP®, is the Founder of Next Phase Financial Planning, LLC, a financial advisor in Prescott, AZ.  Next Phase Financial planning provides retirement, investment and tax planning that helps corporate employees retire with both financial and lifestyle security.