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10 Practical Money Skills to Master Before Retirement

·9 min read

This article originally appeared on The Financially Independent Millennial and was republished with permission.

Everyone wants to enjoy a comfortable retirement, but unfortunately, this goal feels out of reach for most people. Individuals approaching retirement can increase their chances of financial stability by working to master practical skills that will be essential once the working years are in the rearview mirror.

According to a study from Transamerica Center for Retirement Studies, only 27% of US workers are highly confident they'll be able to retire comfortably. So, it's natural that now is the best time to prepare for the future. Here are 10 things everyone should know before they retire. People planning on retiring in the next 5-10 years should start mastering these essential money skills now to avoid any regrets when it's time for retirement.

  1. Defining Retirement

  2. Determining a Safe Withdrawal Rate

  3. Understanding Social Security Benefits

  4. Living on a Budget

  5. Investing for Income

  6. Preparing Yourself for Tax Season

  7. Debt Payoff

  8. Understanding the Difference between Liquid Net Worth and Net Worth

  9. Prioritizing Health

  10. Estate Planning

1. Defining Retirement

Retirement means different things to different people. A helpful first step in the process of preparing for retirement is to define one's retirement. Here are a few details to consider:

  • Does retirement mean no work at all?

  • Can retirement involve a part-time job?

  • What type of lifestyle does the ideal retirement involve?

  • Is traveling important?

  • Are living expenses likely to increase or decrease during retirement?

It's essential to answer these questions and define retirement before making the jump and leaving a career behind. For example, one person may prefer a quiet retirement that involves minimal expenses, while someone else may want to travel and enjoy a more costly lifestyle.

There's no right or wrong approach, but it's critical to have a clear picture in mind. For example, those who want to spend more money in retirement may need to be willing to work longer and save more or find a way to generate income in retirement to support their lifestyle.

2. Determining a Safe Withdrawal Rate

Understanding the concept of a safe withdrawal rate is an essential step in retirement planning. Knowing how much money can be withdrawn each year from retirement savings will help people avoid financial hardship later.

The challenge with determining or calculating a safe withdrawal rate is the fact that there are many unknowns. For example, a standard recommendation is to withdraw no more than 4% of the current value of your investments each year. There's plenty of math behind this recommendation, but those calculations often assume that a retiree's financial situation will remain largely the same for years or even decades to come.

To take a more cautious approach and provide some room for error, some professionals advise a 3% withdrawal rate instead of 4%. A 3-4% withdrawal rate serves as a guide or a starting point, but remember that it's not a hard and fast rule.

Once the acceptable withdrawal rate is determined, work backward to determine the portfolio needed to support a comfortable retirement. For example, someone who expects to have living costs of $50,000 per year in retirement will require an investment portfolio of $1,250,000, based on a 4% withdrawal rate.

3. Understanding Social Security Benefits

Social Security benefits are a crucial source of income for most retirees, but there are important details to consider, like the best age to start receiving benefits.

Under the current guidelines, individuals can begin receiving benefits at 62 years old. However, delaying benefits until the full retirement age of 70 will significantly increase the monthly benefit.

There's no right or wrong approach since each person's situation is different. However, it's essential to understand how the benefits work to make the right decision.

The Social Security Administration provides helpful guidance for those looking to make this challenging decision.

4. Living on a Budget

Most retirees live on a fixed income. Whether the primary source of income is social security, a pension, retirement accounts, or other investments, there's usually a need to live on a budget.

Of course, living on a budget requires the ability to create a budget. Think of a budget as the first tool a financial architect would offer. To budget effectively, it's critical to know how much money is coming in and how much is going out each month.

Creating a budget is only the beginning. Tracking expenses is also necessary to know that the budget is working. Get in the habit of recording every expense. There are several options, including budgeting apps, spreadsheets, or simple pen and paper. Make adjustments to budget categories if needed.

Living on a budget is the most effective way to prevent overspending in retirement. However, it's not easy to adjust to living on a budget all of a sudden. So, during the years leading up to retirement, get in the habit of budgeting and tracking expenses to develop this practical skill.

Download My Budget Spreadsheet Here!

5. Investing for Income

Those who are a few decades away from retirement typically focus on growth with their investments. A longer time frame allows for more ups and downs along the way, with the goal of maximizing long-term results.

In retirement, investments can serve as a source of income. Retirees benefit from investments that pay dividends, providing a source of income without withdrawing from the account and reducing the balance.

During the years leading up to retirement, it's helpful to shift from growth-oriented investments to investing for income. Of course, it's not necessary to devote the entire portfolio to this type of investment. However, most retirees will benefit from having some assets that produce income regularly to supplement Social Security, pension payments, or other income sources.

6. Preparing Yourself for Tax Season

Many Americans hire professionals to prepare their tax returns. However, fewer of these have a good understanding of how taxes work, and how to save money on their tax bill. Of course, preparing taxes can be a difficult task, so using a professional tax service is always a good decision. However, preparing yourself before year-end is a practical money skill that can lead to thousands of dollars in savings.

By planning ahead, you can employ strategies to reduce our tax bill, and keep more of our hard-earned money!

7. Debt Payoff

Avoiding and eliminating debt is a worthy goal at any stage of life, but it's imperative during retirement or leading up to retirement. Living on a fixed income is much more challenging if the budget includes money for monthly debt payments.

Most financial experts recommend paying off a mortgage before retirement, although this may not be realistic for everyone. Living with a mortgage in retirement is feasible with an adequate income or nest egg, but avoiding other types of debt like credit cards, car loans, and personal loans is critical.

Those planning for retirement should evaluate their current debt and what they need to pay off that debt before retiring. The debt snowball and debt avalanche are two different methods that are both highly effective for eliminating debt as fast as possible. The debt avalanche is generally better for numbers-oriented people who want to pay as little interest as possible. The debt snowball is better for those who are looking for a psychological boost to help with motivation.

Read more: Should you Pay off Debt or Save for Retirement

Calculate Your Credit Card Payments

8. Understanding the Difference between Liquid Net Worth and Net Worth

Net worth is one of the most common metrics used to measure wealth. Yet, while net worth does matter, it doesn't necessarily indicate current financial health or the ability to withstand unexpected events.

All assets are counted the same in a net worth calculation. However, liquid net worth considers only the assets that can be quickly liquidated and converted to cash. Why is this helpful? Because liquid assets are more valuable and useful in emergencies compared to illiquid assets.

In an emergency, having $10,000 in cash is more valuable than a piece of jewelry that's worth $10,000. Of course, both would be of equal value in a net worth calculation, but only the cash adds to liquid net worth.

Retirees need to have assets that are liquid in case money is needed with short notice. Therefore, calculating liquid net worth is a worthwhile endeavor because it provides a helpful look at someone's ability to deal with some financial turbulence.

9. Prioritizing Health

Health care costs are a significant concern for many retirees and those who would like to retire but fear they can't afford it. The best approach is to prioritize health and take preventative measures that will minimize the costs long term.

Eating well and getting exercise is standard advice, but it's just as crucial for financial purposes as it is for health reasons. Many retirees depend on Medicare for covering health costs, but Medicare won't cover everything. So it's best to maintain a healthy lifestyle and keep health care and medical expenses to a minimum.

Developing healthy habits is just like building good financial habits–now is the best time to start. Waiting until retirement to prioritize health is not a good idea, so it's critical to begin as soon as possible.

Being healthy is also crucial for being able to enjoy retirement. Travel, hobbies, and spending time with family are all more practical for retirees in good physical condition.

Read More: The Link between Health and Financial Wealth

10. Estate Planning

As retirement gets closer, it's essential to start thinking about estate planning. Ideally, every adult with kids should have a will in place, but estate planning involves much more than simply drafting a will. It's an important subject, so hiring a professional is the best way to ensure that nothing critical is overlooked.

Estate planning is vital because it provides the opportunity to control how assets are handled at the end of one's life. Proper estate planning saves loved ones from difficult decisions and countless hours of paperwork and frustrations. It also ensures that assets will be accessible to loved ones and not held up in an unnecessary legal process.

Many attorneys and estate planners offer free consultations, so it's easy to get input from a few different professionals before hiring anyone.

Final Thoughts

Retirement is an important financial goal, but it's essential to prepare adequately. The practical money skills covered here are helpful for those who are planning for retirement or looking to retire in the next few years. Mastering the skills now will help provide the best chance for a comfortable and enjoyable stage of life.