4 financial milestones to reach before you retire

Retirement is a period to look forward to for a countless number of working Americans, but it can be a financially stressful time, as well. No matter when you choose to retire, here are a few money-related milestones you should aim to hit first.

1. Save enough to cover three months of living expenses

Ideally, you'll have a healthy amount of retirement savings stashed away in an IRA or 401(k) by the time you stop working. (More on that in a minute.) But aside from your nest egg, you should also have a fully loaded emergency fund in time for retirement with enough cash to cover a solid three months of living expenses.

Now, you may be thinking: "Why do I need emergency savings if I have money in a retirement account?" And here's the reason: The purpose of an emergency fund is to give you immediate access to cash to cover an unforeseen need. The money in your IRA or 401(k), by contrast, might be invested, and it therefore might take some time to liquidate those investments and get your hands on that money. Plus, if you cash out investments at the wrong time, you might take a hit if you're forced to sell at a loss.

That's why you'll still need an all-cash emergency fund in retirement. Though you still, conceivably, will have other sources of income, there's nothing more instantly accessible than your personal bank account.

2. Pay off your mortgage

According to the Consumer Financial Protection Bureau, 30% of homeowners 65 and older kick off retirement with mortgage debt. And although it's the good kind of debt to have, it can also become a source of financial stress when you're dealing with a limited income. On the other hand, if you eliminate that pesky mortgage payment before you retire, you'll be able to stretch your budget further.

Another thing to keep in mind is that, as homes age, they tend to get more expensive to maintain. If you manage to pay off your mortgage in time for retirement, you'll be better equipped to cover whatever additional upkeep becomes necessary.

3. Get rid of costly credit card debt

While it's never a good idea to load up on credit card debt, it can be especially problematic going into retirement. If you're still carrying a balance, you'd be wise to eliminate it before you stop working. Currently, seniors 65 and older carry over $6,300 of credit card debt, on average. But no matter how much debt you happen to have, if you bring it with you into retirement, there's a good chance you'll end up taking it all the way to the grave.

Remember, once you're on a fixed income, chipping away at that debt becomes all the more challenging. At the same time, you don't want those monthly debt payments eating up a huge chunk of your budget. If you get out of debt before leaving the workforce, you'll have more financial flexibility and less stress at a time when you're already vulnerable to begin with.

4. Amass a large enough nest egg to replace 80% of your yearly income

In the absence of a crystal ball, it's hard to predict exactly what your living expenses will look like in retirement. But as a general rule, you should expect to need at least 80% of what you previously earned times the number of years you expect your retirement to last. The latter is something you may have to guess at, but if it helps (which it should), the Social Security Administration says that 25% of today's 65 year olds will live past the age of 90. If you're planning to retire at 66 and would rather be optimistic about your health going forward, then you'd be wise to plan for a 25-year retirement (at a minimum).

Assuming that's the case and you're currently within a few years of retirement earning $100,000 a year, to be on the safe side, assume you'll need $80,000 per year times 25 years, or $2 million. Of course, not all of that has to come from independent savings. Say you're entitled to $2,000 a month, or $24,000 a year, in Social Security benefits. That means you'll only need $1.4 million in your IRA or 401(k) -- less if your investments perform well in retirement, thus generating income, and you withdraw from savings at a moderate pace.

If your nest egg has enough to meet that target, or get relatively close, you can feel comfortable pulling the trigger on retirement. Otherwise, it might pay to work a few extra years, amass some more savings, and simultaneously cut down on the number of years you'll need those savings to pay for. But if you want a shot at a reasonably comfortable retirement lifestyle, you'll need the right amount of savings to get there. It's as simple as that.

Once you leave your career behind you, you may have limited options for generating additional income. So before you retire, make sure to have a decent chunk of emergency savings, pay off your home, get out of debt, and establish a respectable nest egg. Otherwise, you risk encountering more financial stress later in life than you bargained for.

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