Many workers don't retire on a whim; rather, they plan out their retirement ahead of time so they're duly prepared. If you're getting closer to retirement but aren't quite there yet, you're probably growing excited about the prospect of leaving the workforce and exploring your next stage of life. But if you want that transition to go smoothly, you'll need to make sure you're in a good place financially. With that in mind, here are a few key moves to make if retirement is about three years away.
1. Assess your savings
Though the income you'll get from Social Security will play a role in helping you manage your senior living expenses, those benefits alone aren't enough. Rather, you'll need your own savings to keep up with your various bills, from housing to food to healthcare. That's why it's critical to take a hard look at your savings a few years before your target retirement date, and make sure they're up to snuff.
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Now when you examine your IRA or 401(k) balance, you'll want to focus on more than just the number; you'll also want to determine what type of yearly withdrawal that balance will allow for. As a general rule, retirees are typically advised to start off by withdrawing 4% of their nest eggs during their first year of retirement, and then adjust future withdrawals for inflation.
So let's say you're sitting on a $300,000 IRA about three years before retirement. That might seem like a lot of money, but when you apply that 4% withdrawal rate, you're looking at just $12,000 of income from savings during your first year of retirement. Given that Social Security pays the average recipient today a little less than $17,000 a year, those numbers combined may not buy you the lifestyle you want.
But there's good news -- if you're not actually planning to leave the workforce for a few more years, you can ramp up your savings rate between now and your estimated retirement date, and boost your nest egg in the process. Case in point: Maxing out a 401(k) for the next three years will leave you with an additional $73,500 for retirement without even factoring in investment growth. (This figure also assumes that you're 50 or older, and are eligible for an annual contribution of $24,500.) But if you wait until you're much closer to retirement to perform that nest egg assessment, you may not get the same opportunity to catch up on savings if need be.
2. Convert some savings to a Roth IRA
Though Roth IRAs offer a number of benefits, the fact that they allow for tax-free withdrawals in retirement is what prompts many seniors to fund one. So if you're housing your savings in a traditional IRA, now's the time to consider moving some of that money into a Roth. This way, you'll enjoy tax-free withdrawals on a portion of your savings, which will no doubt help from a cash-flow perspective at a time when you're getting used to a whole new set of finances.