4 Smart Money Moves to Make as You Near Retirement

Retirement should be a time of celebration. You’ve worked for many years, and now it’s time to reap the benefits: relaxation, traveling, new hobbies, or whatever else your heart desires. But, to make sure you’re able to do these things in retirement, you’ll need to make sure you’re financially fit. Here are four smart money moves to make as you near retirement.

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1. Change your investment allocations

One thing that’s inevitable in the stock market is volatility. Whether in day-to-day movements, bull and bear markets, or corrections, with enough time in the market, you’re bound to experience all ranges of volatility. The further away you are from retirement, the more time you have to recover from down periods in the market, so the focus should be on higher risk, higher-reward assets like stocks.

As you near retirement, your focus should start shifting away from growing your money to preserving what you’ve earned. This generally means reallocating your assets to become more conservative. You don’t want to abandon stocks altogether, but you do want to shy away from higher-risk stocks (like low-cap ones) and focus on more stable investments like blue-chip stocks and bonds.

2. Maximize your 401(k)

The money in your 401(k) may not have as much time to grow and compound as you near retirement, but it’s still worth taking advantage of and maximizing the tax benefits that come with it. This is especially true if your employer matches your contributions because that’s essentially like free money. It’s always important to try to make your employer match the bare minimum you contribute to your 401(k), but it’s especially important as you near retirement.

At age 50 or older, you can make catch-up contributions to your 401(k), allowing for an extra $6,500 annually ($27,000 total). If you only have five years until retirement, that’s another $135,000 you could have contributed to retirement (pre-tax), not including a potential employer match. Even if you make $100,000 and your employer only matches 5% of your contributions, so long as you’re also contributing 5%, you could receive an extra $25,000 in “free” money.

3. Consider rolling your 401(k) into an IRA

One of the downsides of a 401(k) is that it offers limited investments. Unlike other retirement accounts, like Roth and traditional IRAs, you can’t freely invest in any asset you want; you have to pick from the options your plan provider gives you. As you near retirement, you may want more control over the type of investments your money is in, which isn’t feasible with a 401(k) plan.

Rolling your 401(k) plan into an IRA will give you more flexibility and a wider range of assets to choose from that fit your investment needs and strategy near retirement. You will also likely find it much cheaper to hold investments in an IRA because of the fees that come with a 401(k). Not only do you pay administrative fees to your provider, but you’ll also pay the fees for the funds you’re invested in.

4. Begin thinking about how much you’ll need annually

There’s no one-amount-fits-all when deciding how much you’ll need in retirement, but there are basic guidelines you can follow that’ll surely point you in the right direction. As retirement approaches, you want to have a good idea of how much money you’ll be spending, so you can mentally and financially prepare.

The general rule says you should aim to receive 80% of your pre-retirement income in retirement to maintain your lifestyle. If you make $100,000, you’ll want to have around $80,000; if you make $150,000, you’ll want $120,000; and so forth.

The 80% rule isn’t a foolproof approach, but it’s extremely helpful and a good place to begin.

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