5 Steps You Should Take Within 10 Years of Your Retirement

By Markets Fool.com

Planning for retirement is a nerve-wracking experience -- and it only seems to get harder as you get closer to your projected retirement date. Questions about what you should do to prepare for retirement will run through your mind at a mile a minute. Thankfully, The Motley Fool has your back.

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We asked five of our top retirement analysts what steps people should be taking within 10 years of their projected retirement date to make their transition into their golden years smooth and to ensure they get the retirement they have dreamed of. Here's what our experts had to say.

Dan Caplinger
When you're still decades away from retirement, it's fine just to focus on accumulating wealth and investing as well as you can. But when retirement approaches, you need to pay closer attention to the other side of the financial equation: what kind of retirement you want and how much it will cost to get it.

Source: Flickr user Joi Ito.

Many people have no idea what retired life will actually be like, so they rely on general rules -- e.g., replacing 85% of your pre-retirement income -- without factoring in the particular things they'll want to do with their newfound free time. But your retirement income needs can be dramatically different from what you had calculated if you have expectations to pursue more expensive hobbies or to travel extensively. If you look closely at what you want to do in retirement a decade out, then you'll have time to adjust your financial planning if it turns out you need extra money to do the things you've always dreamed of being able to do. Conversely, if your retirement wishes are more modest, a closer examination can reveal that you might be able to retire sooner than expected, gaining valuable time to begin the rest of your life a bit early.

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Digging into the details of your credit card statements may not be your idea of fun, but taking the time to consider your credit card debt before retirement can help you close the gap between what you will collect in retirement income and what you're likely to spend.

Source: Flickr user Wimena Kane.

According to credit research firm Experian, baby boomers have more credit cards and more credit card debt than any other generation. Overall, boomers owe an average of $5,347 on their credit cards. While that may not sound like much, consider that many soon-to-be seniors owe far more than this on their cards.

Since the average retired worker collects just $1,332 in Social Security payments every month and doesn't have the retirement savings to fully replace their pre-retirement income, it may be far tougher for you to pay this debt off in retirement than it is during your working years. Therefore it's wise to set up a plan ahead of time to eliminate that debt. A debt reduction plan could include paying more than the minimum every month or allocating an extra payment to the credit card debt each quarter. Making those additional payments now will mean more money in your wallet during retirement.

Selena Maranjian
One critical thing to do as you approach retirement is to give some thought to when you want to start collecting Social Security. For a little perspective, as of February theaverage monthly benefit was$1,332 per month, which is only about $16,000 per year. That might not look like a lot, but it can make a big difference for many people.

Source: SSA Office of the General Inspector.

Don't have a choice when to start collecting Social Security benefits. If you need the income immediately, then you can start receiving benefits as early as age 62. Note, however, that if you start collecting early, your monthly benefits will be lower than they would be if you started at your or "full retirement age."

If you can afford to put off collecting benefits, your eventual payments will grow by about 8% for every year you delay from your full retirement age (which is 67 for most of us these days) and age 70. Thus you can end up with payments about 24% larger by delaying for three years. Still, that means giving uplotsof smaller payments over the preceding years. The Social Security Administration has noted that, on average, it's close to a wash, whether you start collecting early or late. However, if you live an exceptionally long life, then the wait will be worth it.

Everyone needs to do their own math, and those who have a spouse have more strategies to consider, as they can maximize their collective benefits by coordinating who starts collecting when.

Jordan Wathen
As your retirement nears, it's time to start "stress testing" your budget against your expected income.

Source: AARP via Facebook.

Estimating your eventual investment income is difficult, but some rough calculations should help you check whether you're on track. I like to work backward by comparing any budget shortfall to a reasonable withdrawal rate in retirement. You can do this by multiplying your annual expense deficit by 25 to 30 (roughly the number of years you expect to live after retiring). Thus, if you need $20,000 in annual income in retirement from your investments, you'll need about $500,000-600,000 in investments to safely withdraw that amount annually.

It's a quick and dirty method -- no two people have the same tax rates, the same expenses, or the same life expectancy -- but it's a good way to "ballpark" your needs 10 years out from retirement. In addition, it helps put your spending in perspective, as even small expenses require an enormous amount of savings to cover them in today's low-interest-rate environment.

Sean Williams
My Foolish colleagues raised a number of critical points about what you need to do when heading into retirement, including assessing your spending, your debt levels, and when you'll take Social Security. I would add that pre-retirees need to seriously think about how and when they'll begin withdrawing retirement money from external accounts.

Source: Myfuture.com via Flickr.

The Roth IRA has become a popular retirement tool for many Americans, and it gives them the ability to generate long-term capital gains that are free of taxation -- so long as the withdrawal rules are followed. However, a number of other taxable vehicles, including 401(k)s and traditional IRAs, which defer taxation until a retiree makes a withdrawal; annuities; or a standard taxable investment account, which can be taxed at a long-term capital gains rate or at an ordinary income tax rate, can complicate matters.

For example, in certain states a percentage of a retiree's Social Security benefits can be exposed to federal taxation if an individual or couple earns too much money. Thus it's in your best interest to understand exactly how much you might be generating in taxable income in combination with your Social Security earnings. Planning how much you withdraw from each investment vehicle can mean the difference between a small or nonexistent tax bill and a huge one that costs you a lot of money.

The article 5 Steps You Should Take Within 10 Years of Your Retirement originally appeared on Fool.com.

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