6 Things to Do If You're Nearing Retirement
Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account will change from 72 to 73 beginning January 1, 2023). For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. (0123-3U8P)
If you're thinking of retiring within the next 10 years, it's likely you're already aware that there are a lot of variables to consider. Questions abound, and the answers can sometimes require sorting through quite a bit of complexity, including a wide range of "what ifs" and unknowns.
"Many retirees say transitioning from saving to living off their savings is one of the biggest challenges of retirement," says Rob Williams, CFP, CRPC, CPWA, managing director of financial planning, retirement income, and wealth management for Schwab Center for Financial Research.
"But thinking through some of the most critical questions early on—like how much you'll have, how much you'll need, when to take Social Security, and how taxes could affect your savings—and then putting a realistic plan in place can help take some of the pressure off."
Taking steps toward the retirement you want now, while you're still working, can also give you time to identify shortfalls and make adjustments—which could increase your probability of long-term success.
Here are six things you can do now to set yourself up for a smoother retirement when the big day comes.
#1: Find out where you stand
According to Schwab's Modern Wealth Index survey, over half of Americans with a written financial plan feel "very confident" about reaching their financial goals, compared to only 18% of those without a plan. If you don't have a retirement plan yet, now is a good time to create one. If you do, check it at least once a year to make sure it matches your needs and goals. Details you may want to adjust include your expected retirement date, future expenses, and your expected savings and income sources.
It's also a good idea to put your plan to the test from time to time. You can use a retirement calculator to see if you're saving enough. But you'll get more comprehensive, personalized results if you use a reliable digital planning tool or work with a financial advisor. Both can help you look at a range of scenarios and your probability of success given your unique set of variables (for example, plans to relocate or start a small business in retirement, gift and estate plans, life expectancy, and other personal factors).
In addition to checking your retirement plan, Rob suggests checking your portfolio once a year to be sure it still makes sense for you. Things that may change as you near retirement include your risk tolerance, desired asset allocation, diversification of investments, and your plan for regular rebalancing.
#2: Boost your savings, if you need to
Whether you find yourself in catch-up mode or just want to save as much as you can before you stop working, there are things you can do to help your nest egg grow.
"First, contribute as much as you can to your employer-sponsored account—401(k), 403(b), 457(b) or Thrift Savings Plan," says Rob. "In 2022, you can contribute up to $20,500. If you're at least 50 or will be by year's end, you can also make a catch-up contribution of $6,500, for a total of $27,000."1
"Once you've maxed out your employer account—or if you don't have one—consider saving and investing more with a traditional IRA or Roth IRA, or a brokerage account. If you're eligible, you can also use a Health Savings Account (HSA) to save for future health care costs."
You can also make catch-up contributions to your IRA starting the year you turn 50. And for your HSA, they're allowed starting the year you turn 55.2
How much could you contribute in 2022?
|Type of account||2023 contribution limit||2023 catch-up contribution||Total allowed for 2023 with catch-up contribution|
|Employer retirement plan—401(k), 403(b), 457(b), or Thrift Savings Plan||$22,500||$7,500 (starting the year you turn 50)||$30,000|
|Traditional IRA, Roth IRA||$6,500 (across all of your IRAs)||$1,000 (starting the year you turn 50, across all of your IRAs)||$7,500|
|Health Savings Account (HSA)||
|$1,000 (starting the year you turn 55)||
|Brokerage||No limit||No limit||No limit|
#3: Plan ahead for Social Security
You can start taking Social Security as early as age 62. But you'll receive a smaller check each month than you will if you wait until your full retirement age. If you wait until after your full retirement age, your Social Security income will increase up to 8% for every year you delay, up to age 70. After age 70, there's no further increase for delaying.
"The decision of when to take Social Security depends heavily on your specific situation, including other income sources, life expectancy, and your spouse's needs and circumstances," says Rob. "There's no correct age to take it for everyone, but a good rule of thumb is to wait as long as you can afford to, up to age 70, since delaying it can pay off over a long retirement."
Retirement ages for full Social Security benefits
|If you were born in…||Your full retirement age is…|
|1954 or earlier||You've already hit full retirement age|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 or later||67|
#4: Consider tax-smart strategies now
One of the most important things to consider while you're still saving for retirement, is how to minimize taxes down the road. While tax laws and rates are likely to change, there are ways to plan for these unknowns and set yourself up for a potentially better tax outcome.
"One approach is to spread your savings across a diverse selection of accounts with a variety of tax treatments," says Rob. "Saving in a mix of tax-advantaged and taxable accounts—for example, a 401(k), Roth IRA, HSA, and a brokerage account—can give you more flexibility and help you better control your taxable income when it's time to take money out in retirement." Rob recommends considering an appropriate mix of tax-deferred and Roth accounts, based largely on your current tax bracket.
- If you're in a lower tax bracket (0%, 10%, or 12%), consider contributing the maximum to Roth accounts since your tax bracket in retirement is likely to be the same or higher.
- If you're in a middle tax bracket (22% or 24%), it may be more difficult to predict your future tax bracket. Consider splitting your retirement savings between tax-deferred and Roth accounts so you can benefit from both tax treatments.
- If you're in a higher tax bracket (32%, 35%, or 37%), your tax rate in retirement is likely to be the same or lower than it is today. So it may make sense to maximize your tax-deferred accounts—such as your 401(k), 403(b), 457(b), or Thrift Savings Plan.
Should you consider a Roth conversion before you retire?
The main benefit of a Roth IRA is the ability to withdraw earnings and contributions tax-free in retirement. If you have taxable funds to cover the fees and won't need your traditional IRA for living expenses, converting to a Roth IRA before you retire could make sense—especially if you expect to be in a higher tax bracket in retirement or want to leave your savings to an heir tax-free. Other reasons to consider a Roth conversion include tax diversification of retirement accounts or irregular income streams with lower than usual income in the given year.
Once you retire, you can no longer contribute to a Roth. So if you're not sure how it fits into your plan, consider talking to a financial advisor to be sure.
#5: Get a head start on future health care costs
Medicare is a big piece of the retirement health care puzzle. But it won't cover everything, and there are out-of-pocket costs.
Rob says, "Be sure to include the costs of premiums and out-of-pocket expenses in your retirement budget. When Medicare kicks in at age 65, it's reasonable to plan on spending about $450−$850 a month."3 But where you live, inflation, and other personal factors play a role, so consider talking to a financial planner for a more accurate estimate.
If you're eligible, an HSA can help you save for health care costs before and after you retire. An HSA lets you set aside pre-tax dollars to pay for qualified medical expenses (including Medicare premiums and out-of-pocket costs). Money you save and invest in your account also grows tax-free, and as long as you use it for qualified medical costs, you won't owe taxes on it. At age 65, you can no longer contribute to your HSA, but you can use any money you've saved in it to pay for health care costs tax-free. After age 65, you can also use the funds for non-medical expenses without a penalty—you'll just owe ordinary income tax.
If you're receiving Social Security at age 65, you'll be enrolled automatically in Medicare Parts A (hospital) and B (medical). You can also add Part D (drug coverage). If you're not receiving Social Security, you'll need to sign up on your own. Keep in mind, Medicare has special enrollment periods, and signing up late can lead to penalties or gaps in your coverage.
Costs for Medicare include a deductible and coinsurance for Part A, and premiums, deductibles, and coinsurance for Parts B and D. You can also purchase Medigap to help with expenses Medicare doesn't cover. Medicare Advantage is another option that covers Medicare Parts A and B, and often includes services original Medicare doesn't cover, like dental and vision, through a private company.
About 60% of people over 65 will also need long-term care at some point, and the costs can be high.4 If you're not sure how you would cover these expenses, long-term care insurance might be worth considering. It can help cover costs if you or your spouse need in-home care or nursing (including help with daily activities), or care in a nursing or assisted-living facility due to a chronic illness or injury.5
Retiring before age 65?
Until Medicare kicks in, health coverage options include health plans through the Health Insurance Marketplace, COBRA, private insurance, employer retiree insurance (if offered by your employer), insurance from your spouse's employer, and faith-based health care ministries.
Another option? Continue to work full- or part-time to keep health benefits. While most employers don't offer health benefits to part-time employees, a few do.
#6: Start thinking about retirement income
Even if retirement is several years away, it's a good time to start thinking about the steps you'll take when it's time to start living off your savings. "After putting money away for so long, many investors are surprised to find they don't have a strategy for converting their savings into a lasting retirement income," says Rob. "But making the shift from saving to paying yourself is critical." At least one to two years before you retire:
- Get to know your retirement income sources, including all retirement, bank, and brokerage accounts, plus other income (such as Social Security, a pension, annuities, or HSA funds). Know how much you'll receive from each source, when you can start taking distributions without a penalty, and how each source will be taxed.
- Take a close look at your expenses, including money for needs (like food, housing, health care), wants (like travel and entertainment), and wishes (like gifts or a second home). Ask yourself about things like paying off your mortgage or other debts, relocating or downsizing, and how you'll cover health care costs.
- Start planning your retirement income, including a comprehensive strategy for how much you'll spend, how you'll invest, how to get your money when you need it, and how to stay on track over time. To connect all the dots in a tax-smart way, consider working with a financial advisor, tax professional, or both.
1Contribution limits change slightly each year and may vary by plan. For specific information about your employer-sponsored retirement plan, see your benefits website or contact your Human Resources department.
2Eligibility rules apply to Roth IRAs and Health Savings Accounts.
3These estimated costs are for general informational purposes only and should not be considered an individualized recommendation or a personalized estimate. Your health care costs will depend on a number of factors, including inflation and your specific situation. For specific advice, we recommend consulting with a financial planner.
4Source: U.S. Department of Health and Human Services.
5Most long-term care insurance policies contain exclusions, waiting periods, limitations, and terms for keeping them in force. Please ask us for full details and cost information.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for their own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.
Diversification, asset allocation, and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when a nonretirement account is rebalanced, taxable events may be created that may affect your tax liability.
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IMPORTANT: The projections or other information generated by an investment analysis tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Traditional IRA withdrawals are subject to ordinary income tax and prior to age 59½ may be subject to a 10% federal tax penalty.
If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and a 10% federal tax penalty.
Roth IRA conversions require a 5-year holding period before earnings can be withdrawn tax free and subsequent conversions will require their own 5-year holding period. In addition, earnings distributions prior to age 59½ are subject to an early withdrawal penalty.
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