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Key Takeaways
- To prepare your finances for retirement, consider stashing more money in cash and fixed-income to avoid touching your nest egg if a bear market occurs.
- If you're still short of your savings goal, you could take advantage of higher catch-up contributions while you're still working or try phased retirement to boost your savings.
- Before you retire, start tracking your spending to get an idea of how much money you'll need to cover your expenses in retirement.
If you're expecting to retire in 2025, there are steps you can take to prepare for the next stage of life.
If you’re planning to retire in 2025, you may want to consider making changes to your investments, understanding your spending habits and contributing more money to your retirement account if needed.
Prepping Your Portfolio For Stock Volatility
As people approach retirement, experts generally recommend that people make their portfolios more conservative. While the S&P 500 has been on a tear this year, the outlook for next year remains uncertain, with some analysts warning about a fall in equity prices in the future.
Kevin Khang, Senior International Economist for Vanguard, says that an early bear market can have a negative impact on people’s retirement savings if not taken care of.
“We’ve been in a strongly appreciating stock market environment. That type of environment can make your sense of risk a little dull,” said Khang. “One way to be prepared [for a downturn] is to be a little more conservative or set aside cash. As long as you don't touch your portfolio and crystallize the temporary bear market, you’ll be okay.”
Cameron Valadez (CFP at Planable Wealth) recommends to his clients that they have an emergency fund of conservative investments. These include cash equivalents of one to two year’s expenses and laddered government securities such as Treasurys, Treasury inflation-protected Securities or TIPs.
“Generally, every five years, we have some sort of market downturn in the 20% to 30% range. That’s fairly normal,” said Valadez. “And if someone has five years worth of cash [and bonds], they should be able to weather the storm.”
Consider a Phased Retirement, If Possible
If they can, Carolyn McClanahan, a CFP at Life Planning Partners, suggests that her clients try out phased retirement where they work reduced hours while still doing some of the activities they want to do in retirement.
“[Phased retirement] allows you to get used to what you're going to do with your time when you're no longer working,” said McClanahan. “It also allows you to keep [your] spending in check and still earn an income.”
Christine Benz is director of Personal Finance and Retirement Planning at Morningstar. She notes that a gradual retirement could improve the emotional wellbeing.
“[Working] gives people a sense that they have a purpose,” said Benz in an October interview. “Work often puts us into contact with other people, which is really good for our brains as we age."
If Necessary, Boost Your 401(k) Contributions
And if you’re not feeling confident about how much you have saved and you're still working, it could be a good idea to stash more money in your 401(k).
Thanks to Secure 2.0, some older workers will be eligible to make even greater contributions to their workplace retirement plans like 401(k)s. Starting in 2025, workers who are ages 60, 61, 62, or 63 can make contributions worth up to $11,250—versus $7,500 for all other workers age 50 and older.
Michael Griffin, a CFP at Henssler Financial, suggests that this rule could be especially beneficial for people who didn’t save a lot when they were younger. “If people have the additional cash flow from their earned income to make those catch-up contributions, that’s a good avenue to take,” said Griffin.
Evaluate Your Spending
If you’ve been diligently saving and investing over decades, it’s important to have a spending plan as you head into retirement, so you don’t end up running out of savings.
A common rule-of-thumb is that retirees will spend roughly 80% of their preretirement income, but Benz recommends that people get more granular when developing their spending plans before they retire.
“Look at what you're spending now, and how that might change in retirement—taxes might change, you might be planning relocation, you may no longer be commuting. Look at the whole gamut of expenditures” said Benz. “You can't perfectly foresee the future, but you can at least get your arms around some of these knowables.”
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