Checklist to Retire in 10 Years
- Take advantage of peak earning years to grow income.
- Turbocharge retirement savings.
- Begin building out an allocation to safe investments.
- Start visualizing your in-retirement lifestyle.
- Formulate a long-term-care plan.
Valentina Djeljosevic: Hi, I’m Valentina Djeljosevic. Welcome to the second episode in a new miniseries for Morningstar called Your Retirement Countdown. In this four-part series, we’re sitting down with Christine Benz, Morningstar’s director of personal finance and retirement planning. We’re talking about the key things you need to do to retire comfortably based on how far away your retirement start date is, whether it’s 25 years away, five years away, or just one year away. In today’s episode, we’ll focus on what to do if your retirement is 10 years away. Don’t worry about taking notes because we’ll give you a checklist at the end of our interview. Nice to see you, Christine.
Christine Benz: Valentina, it’s great to see you.
Djeljosevic: Let’s kick it off with a basic question about that time frame of 10 years. Are we really talking about strictly 10?
Benz: No, it’s not an exact science, but I would say this is for anyone over 50 who plans to retire at a traditional-ish retirement age. If you have retirement on your horizon, maybe in your early 60s or mid-60s, this is kind of the zone that we’re talking about today.
Your Retirement Countdown, With Christine Benz
Finding Ways to Grow Income
Djeljosevic: OK. In those 10-ish years leading up to retirement, the top priority is maximizing career and income gains. Why is that so important?
Benz: Well, I sound like a broken record on this, but really, everything gets easier in terms of your retirement plan if you can find ways to grow your income. With 10 years to go, there’s still time and opportunity to maybe raise your hand for additional responsibilities, invest in a little bit of additional training, and make sure that your technology skills stay current. All kinds of things like that are worth considering. The reason is that if you are able to enlarge your income, you can save more. That’s really the key idea; you can save more, you can potentially retire early if things work out well for you and your portfolio. This is just a great life stage to continue to think about enlarging your income.
Increasing Savings as Part of Retirement Planning
Djeljosevic: Retiring early certainly sounds exciting, right? Speaking of savings, the next item on our checklist is building up your retirement savings. What are some effective ways to do that?
Benz: Well, if you’re post-age 50, you have a great tool in your toolkit, which is that you can take advantage of what are called catch-up retirement plan contributions. If you’re contributing to a company retirement plan like a 401(k), if you’re contributing to an IRA, you can make larger contributions at this life stage. The idea is that you can turbocharge your retirement savings with these additional contributions. This is often a life stage when people are looking at college funding in the rearview mirror, so maybe that is behind you. You may have an opportunity to do those additional contributions. You don’t want to stop there. High-income, heavy savers should take a look at whether they’re eligible to make what are called aftertax 401(k) contributions. We’ve written about this topic. It gets a little bit complicated, but you’d want to investigate whether those are an option for you.
They can be really nice ways to continue to enlarge your contributions. Another question that crops up in this vein is whether you should be making traditional tax-deferred contributions, so you’re earning a tax break on those contributions, or whether you should be making Roth contributions. At this life stage, people may think, “Well, I understand the benefit of having Roth accounts because I’ll be able to take those tax-free withdrawals in retirement.” The problem is that this is often a peak earnings period for many people. The Roth contributions, where you’re paying taxes on the money going in, may not be advantageous for you. You may be better off making traditional tax-deferred contributions. If you have questions about all of this, this is a good spot to get some advice, either from your tax advisor or a financial planner, on what kind of contributions to make. Oftentimes, if you’re this close to retirement and you are in a high earnings period of your life, it may be more advantageous to make those traditional tax-deferred accounts.
You also want to take stock of whether you have ancillary retirement savings accounts that you can contribute to, like a health savings account, where, if you’re able to fund your healthcare expenses with nonHSA assets, the beauty is that you can get the HSA invested in something long term and let the money compound and grow until retirement. You’d also want to be looking at taxable brokerage accounts as another opportunity to grow your retirement savings.
Building the Ballast Portion of Your Portfolio
Djeljosevic: OK. That’s excellent advice. Let’s talk a little bit about rebalancing toward a safer mix. What kind of investments belong in a portfolio around the 10-year mark, and how can people adjust their allocations?
Benz: Right. Leading up to this period, people often run with very equity-heavy portfolios, and that makes a lot of sense because when you’re younger, you have a lot of time to recover from the market’s periodic downdrafts. As you get closer to retirement, you still want to have ample equity exposure. I think a good target at this life stage is roughly two-thirds of your retirement portfolio should go into stocks, but you do want to start adding some safer assets around the margins. You’d want to do this within your tax-sheltered retirement savings vehicles, but you’re thinking about high-quality fixed-income assets, and the beauty of having them is that they are ballast for your stocks. If you happen to retire earlier than you expected, if you need access to your funds, the beauty of building that ballast portion of your portfolio is that you could withdraw from it if you needed to, and you’d likely be able to do so without taking money out of your portfolio, from that portion of your portfolio, when it’s down.
You’re thinking of high-quality bond funds; short and intermediate term is where I would put my focus. If you’re investing in some sort of a target-date fund that’s happening automatically for you, that derisking process, that can be a wonderful hands-off way to manage your portfolio, but you do want to think about that unexpected need to tap your capital as you move into your 50s. I get nervous when I talk to pre-retirees who have a lot of precision around their retirement date, where I sometimes hear, “I plan to retire in seven years on my birthday,” or something like that, maybe, and my hope is that you’ll be able to do that. But what we see is that there’s often a disconnect between when people think they’ll retire and when they actually do retire. Oftentimes, people retire earlier than they expected, and that may be for happy reasons, their portfolio got them to where they needed to go, but there may be reasons that people are dislodged from the workforce earlier than they wanted to, whether health reasons or job loss, whatever the case might be. You do need to not wait until the last minute to start building in those safer assets. You’d be adding to them in this period where you’re about 10 years leading up to retirement.
Testing Out What Retirement Looks Like
Djeljosevic: OK. I want to touch on something besides finances, maybe a behavioral factor. What kind of things do people need to consider?
Benz: Well, I think this is a wonderful life stage to try to visualize what retirement will be for you. Spend some time trial running it. Potentially use a vacation or use a week of your two-week vacation, whatever the case might be, to just be at home and see what your days feel like—what feels good, what feels lonely, what feels not so great. Take mental notes, experience this if you’re part of a married couple or any sort of partnership, do this together. See, is this too much togetherness? Get a sense of what retirement will feel like, and also take stock of any big-picture goals that you have for your retirement plan. Do you want to travel? Do you want to relocate to some other location? Do you want to continue to work in some capacity? We’re hearing a lot more from people about how some aspect of work is something that they’re doing longer. Maybe that’s something you have no interest in, but spend some time ideating. You don’t need to create a really tightly crafted budget or retirement spending plan at this life stage, but doing some visualization, I think, can go a long way toward helping inform what you need your finances to do for you in retirement.
Djeljosevic: OK. I’m visualizing myself on a beach in Hawaii.
Benz: All right.
Accounting for Long-Term-Care Needs
Djeljosevic: Let’s bring it back to finances. One of the things that people sometimes don’t take into account is long-term care, and that can really deplete their savings. Why is this 10-ish year mark the right time to come up with a long-term-care plan, and what kind of things do people need to keep in mind?
Benz: It’s an important question, Valentina. The reason I would call it out at the 10-year mark, so for people who are in their early 50s, is that for people who want long-term-care insurance, this is a great life stage to investigate it, because oftentimes people are disqualified from purchasing pure long-term-care insurance because they’ve encountered some kind of health condition that doesn’t allow them to purchase long-term-care insurance, at least not cost-effectively. If you’re thinking that long-term-care insurance is how you want to address the potential need for long-term care, it’s a good life stage to start doing some fact-finding, get some objective guidance, and don’t go straight to an insurance company. Ideally, you would be working with a financial planner to size up your total retirement resources to see whether insurance is even appropriate in your situation. For some people, my guess is a lot of our viewers, people with financial assets, they may want to self-fund long-term-care needs if they should arise, if they should have a paid long-term-care need.
Here, I think it makes sense to start thinking about having a dedicated long-term-care fund. You’re taking a portion of your portfolio, and you’re earmarking it for long-term care. That can be a great strategy for people who have more than enough to tide them through their own portfolio spending, their own lifetime spending, and to have a separate long-term-care fund. For other people, long-term-care insurance or a long-term-care fund may not be financially viable. They may need to rely on government-provided care, and it’s worth noting that government-provided care for long-term care through Medicaid is the largest payer of long-term care in the US today. Many people will fall into this bucket, where they will need to rely on government resources for their care.
Djeljosevic: Right. This is such great stuff. Thank you so much, Christine.
Benz: Thank you so much, Valentina.
Djeljosevic: OK. We promised you a recap, and here it is. If you’re retiring in about 10 years, here are five things to do. First, take advantage of peak earning years to grow your income. Second, turbocharge your retirement savings. Third, begin building out an allocation to safe investments. Fourth, start visualizing your in-retirement lifestyle. Lastly, formulate a long-term-care plan. For more of Christine’s retirement insights, check out her free weekly newsletter, Improving Your Finances. You’ll find a sign-up link below. Thanks for watching.
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