3 important tips for investing before retirement

Do you know where your money will come from in the first few years after you hang up your hat? Maybe you have a decent nest egg, but what happens if the market takes a big downturn the year you plan to retire? You may be able to keep working while you wait for the market (and your investments) to recover, but what if you can’t stay at your job?

The way to avoid this type of anxiety is to set your investment buckets based on time. In other words, you want to age your money so that it will be ready when you need it. To properly plan for retirement, you’ll want to have your money set aside in three buckets.

• Short term investment: This bucket is for money you intend to use for living expenses in the first one to five years of retirement. Since you want this money to be ready and accessible, you want stability and liquidity—which means you’ll invest in cash equivalents that protect the principal. Your short-term investments may include CDs, US Treasury bills, and money market funds.
• Medium term investment: The money you intend to use for retirement income for 6 to 15 years of retirement will go into this bucket. Since you don’t plan to use this money for a while, you can be aggressive while still aiming to protect the principal. Generally, your medium-term investments will include a mix of bonds and stocks, but lean more toward low-risk bonds.
• Long term investment: Just because you’re 30 doesn’t mean you can’t invest like a whippersnapper. This investment bucket contains money that you don’t intend to touch until at least 16 years after retirement, which means you have time to allow this money to weather any market fluctuations—and take advantage of the high risk/high return. assets such as shares.

Re-evaluate your investments

Each year, you will recalibrate these buckets accordingly. When your long-term investments go bust, you’ll move some of that money into your medium-term bucket, and move some of the medium-term money into the short-term bucket. This way, you will always have money available for your short-term investment in your living expenses, and you can check the weather for your medium and long-term investment.

Setting up your investment buckets before retirement will not only give you peace of mind about where the money will come from in those first few years, but it will also set you up for investment success during retirement.

The amount of money you get from Social Security depends on your benefit history and your age when you apply for benefits. The Social Security Administration uses your 35 highest earning years in your career to calculate your benefits. If you have worked for less than 35 years, the calculation uses 0s for the missing years. This means that one of the best ways to maximize your Social Security benefit is to make sure you’ve worked for at least 35 years.

Your age at Social Security enrollment is another factor that determines your benefit. The normal retirement age is between 66 and 67, depending on the year you were born. Beneficiaries receive their full benefit if they file for Social Security at their normal retirement age. You can apply for benefits just before your 62nd birthday, but taking them early will permanently lower your monthly check. The earlier you take benefits, the higher your down payment.

However, you can also wait to receive benefits until you are 70 years old. Each year you wait to receive benefits between your normal retirement age and your 70th birthday increases your benefits by about 8% per year.

Social Security benefits are guaranteed. (Really! If Social Security passes the teakettle, it will be because the US government collapses. That may not be an unlikely scenario, but it’s still very possible—and if it does, we’ll have bigger problems than Social Security to worry about.) That means that waiting to take your benefits is guaranteed to blow you more money and is the best way to ensure a steady income no matter how long you stay.

You can check your salary records and proposed benefits at mineSocial Security.

A 65-year-old person retiring in 2024 will need about $157,500 for health care in retirement, even though they are eligible for Medicare. Unfortunately, health care is often among the biggest expenses of retirement, and many retirees are not really prepared for the high costs.

One of the best ways to plan ahead for these expenses is through a Roth IRA. Since Roth-style retirement accounts are funded with income that has already been taxed, the funds grow tax-free and can be accessed tax-free in retirement.

If you have a major medical need, you can use your Roth IRA money to pay for it, without affecting your taxes in retirement. Since Social Security benefits are taxable, avoiding a big change in your taxes when you have to take a big chunk out of your investments will help keep your retirement income steady.

On the other hand, Roth IRA funds do not have to be used for any specific purpose. If you’re happy and in good spirits throughout your retirement, your Roth IRA funds can be used to pay for a Jet-Skiing vacation to celebrate your 100th birthday.

Looking ahead to the next chapter of your life is both exciting and scary, especially if you’re not sure how your money will work in retirement. Taking your pre-retirement years to plan your retirement investment buckets, plan your Social Security benefits timeline, and set aside money in a Roth IRA to help pay for future medical expenses will help you feel more prepared for retirement.

And of course, getting your financial ducks in a row leaves you time and space to think about planning the fun you intend to have after retirement. Bring on the Jet Skis!