7 Money moves to make for pre-retirees
As we all should know high interest debt can be detrimental to anyone’s financial situation, especially if you're getting close to retirement.
WELL, WHAT SHOULD YOU DO ABOUT IT?
First I would come up with some type of plan to pay down the debt. There's different schools of thought on this, but I personally like addressing the highest interest debt first.
I want to help you get your year started off right and I want to address 7 money moves that all pre-retirees should be making. So without further ado let’s begin:
#1: REVIEW YOUR BUDGET
As we begin the year, it is a good time to look back and see how you spent your money in 2024. You might be pleasantly surprised, or you might be horrified.
I usually advise doing that by downloading your bank account's or credit card transactions. I do this myself at the end of every year. That way I have a record of this information.
First of all typically once you go past approx. 13-14 months banks and credit card companies wont allow you to download those transactions. So download those within a reasonable time. Once downloaded, you can look to see where your money was, it is extremely important to keep track of where your money is going.
Once you've done that, you can then identify any areas that you want to improve in. As we have spoken about before, things like a gym membership or a monthly subscription such as a Netflix account that you're just not using are good things to cut out as you set yourself up for your budget in 2025.
#2: PAY DOWN ANY HIGH INTEREST DEBT
Maybe this is debt you accumulated throughout the holiday season. As a lot of us do, we buy many gifts for people, or it could be debt that you've had for a while and you just haven't addressed it well. High-interest debt can be especially detrimental as you’re getting close to retirement.
WHAT SHOULD YOU DO ABOUT IT?
Well, after we’ve identified the issue, you should come up with some type of plan to pay that down. There's different schools of thought on this, but I personally like addressing the highest interest debt first.
Figure out all the debt that you have, add it up, and from there figure out the interest rates and begin starting to make extra payments towards the highest interest loans first. So you are working your way through your debt and can tackle the lowest interest rates last.
THE SECOND OPTION, POTENTIAL REFINANCING
You could consider refinancing your mortgage, if you have a home and equity therein. Have conversations with the appropriate loan officer(s) and real estate agent(s) to determine if the current market rates and home values in your market make refinancing a smart move. This can help you tackle your high-interest debt head-on while wrapping it into your newly secured (hopefully low-interest) mortgage payment.
If you have equity in your home that you could borrow against, then consider doing that. But you will have to consider, paying some fees which occur anytime you refinance, make sure to balance out the cost to see whether or not this option would be appropriate for you.
If you owe $10,000 or $20,000, it's probably not recommended that you go through the process of refinancing your mortgage, but if you have $30,000, $40,000 or $50,000 of high-interest debt. And you can't see yourself being able to pay that off in the next year or two, then maybe refinancing could make sense.
THE THIRD OPTION, HOME EQUITY LINE OF CREDIT (HELOC)
Oftentimes, it is not as good as refinancing because with most home equity lines of credit their interest rates tend to be variable. Usually after the first year or so, the interest rate on the loan could go higher, most likely not as high as your credit card interest rate is, but that is something that could be a secondary option for you.
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#3: INCREASE YOUR RETIREMENT PLAN CONTRIBUTIONS
It's always a good idea to look at what you're contributing towards your retirement plans at the beginning of the year, and if you find that you have extra money left over at the end of the month. Money that you might be spending on unnecessary things, you should shift that over into your 401K plan.
You've probably heard the saying pay yourself first. Well, the best way to pay yourself first is usually through a retirement plan. The more automated you make that process, the less likely you are to spend that money.
WHAT WILL THIS DO TO MY TAXABLE INCOME?
It can change a lot. If you go right on the website of your 401K provider you can play around with the contributions and see how it could impact your paycheck and tax bill.
Sometimes you might have to go to your payroll provider's site. As well If ADP or Paychex is your payroll provider, by going to their website you can play around with the percentage you're contributing into your 401K plan or retirement plan to see the net impact.
I've looked at this for clients and I usually go to ADP's website. I'll put a link below where you can go and use ADP's paycheck calculator so that you can estimate this yourself. You don't have to log in or create an account.
The ADP Paycheck Calculator (it’s FREE)
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#4: REVIEW YOUR ASSET ALLOCATION
For those who are not familiar with asset allocation. Very simply, that's the money that you have in more risky or growth investments. For example: the stocks, real estate, and commodities assets versus the more conservative or less risky bonds or cash equivalents. And everybody should know what their mix is.
The more that you have in stocks, real estate, and commodities, the more growth potential you have. However that comes with more risk in your portfolio. The more you have in cash or bonds, the less fluctuation and risk you have, but you will also have less growth potential.
Everyone should have a target allocation. This means the amount that you want to have between these different asset classes which can depend on what stage of life you are currently in.
As most studies and professionals will tell you: the closer you get to retirement, the more conservative that you want to be. This is because in the event of a major stock market, real estate, or commodity decline, you don't have as much time for your money to recover.
So first of all, get an asset allocation target. You can do this by working with a financial planner or doing some research on your own to determine what your current allocation should be.
Chances are if you haven't reviewed your asset allocation in a while. It's most likely more aggressive than it was when you began, 2024 was a very good year for most asset classes and certain positions might have grown more than others.
WHAT DOES THIS MEAN FOR YOUR ASSET ALLOCATION?
This means your asset allocation might be taking on more risk than you originally designed it to. In this case it could be a good time to review it. If you have money invested in stock, real estate, or commodities, then take some profits and use it to rebalance back to your target allocation.
If you never had an asset allocation, it's a good idea to look at how you're invested. Over time more and more people have their money invested in target date funds, which are funds that are designed for a specified date of maturity. If you are in this kind of fund, it’s important to understand your allocation and review if you still want to be in that fund.
#5: CREATE AN EMERGENCY FUND
Everyone should have access to some type of emergency fund. We’ve talked recently about an emergency fund in great detail on my podcast. However, I will provide a summary of the importance of an emergency fund.
An emergency fund works by setting aside money in a bank account, money market account. As well if you have money in a Roth account, Roth IRA, or Raw 401K, you could also use that as an emergency fund so long as you have the account open for five years and you're 59 1/2.
A high-yield savings account is another option to hold your emergency funds. Depending on market conditions, high yield saving accounts can be an attractive alternative to a traditional bank account.
The best way to open one is usually through an online bank, but depending on rates you might not want to go through the hassle. It's okay to keep your money in a checking or savings account at that point.
Depending on your situation, you should have anywhere from three to six months of money saved up in one of these accounts.
HOW TO START BUILDING YOUR EMERGENCY FUND:
Once you make sure that you have the account set up. Start funding it by putting a little bit of money from each paycheck into the account and get one built up with a few thousand dollars, so that at a minimum, if there's an out-of-pocket expense you weren't planning on, you have that money accessible.
#6: REVIEW YOUR LIFE INSURANCE COVERAGE
As you're getting close to retiring it is important to make sure you have proper life insurance coverage in place. So that if you or your spouse were to pass away prematurely, the remaining spouse could still attain the goals you two had set out.
Whether that goal was retirement, or helping fund your children's education or pay for a wedding for a child. Whatever it is you want, make sure that lost income is protected and your goals can still be achieved.
HOW TO TELL IF I NEED LIFE INSURANCE?
If you're retiring, let's say in the next year or two, you might be in a position where you no longer need life insurance. To determine your level of need, you would look at your projected cash flow in retirement and figure out how much you'd be getting from Social Security, pensions, and how much you can draw from your retirement accounts.
If you or your spouse were to pass away and the remaining spouse would still be OK even with the loss of your income, then you may no longer need life insurance. If you don't need that life insurance. You might want to consider canceling it to save money.
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#7: REVIEW YOUR ESTATE PLANNING
Reviewing your estate planning is an important thing for everyone to do.
I find from meeting with clients over the years, this is something that I remind clients of often. Estate planning is one of those things you never get to right away. It's like cleaning out your basement, something you know you have to do, but it does not feel like a pressing issue.
WHY SHOULD I MAKE ESTATE PLANNING A PRIORITY?
Well, you want to bump estate planning higher up your priority list because if you don't have a plan and you do pass away. Things might not go the way that you envisioned. Which could make things really difficult for your beneficiaries or your heirs. However everything can go a lot smoother by doing a few simple things.
THOSE THINGS CAN INCLUDE:
Make sure that you have a will, and have beneficiaries named on your retirement accounts, on your life insurance policies or any annuities that you have.
Another thing that you can do to simplify your estate is possibly setting non-retirement accounts up as a transfer on death account or even adding someone on as a joint tenant. This can really simplify your estate process as well as speed up the probate process.
It is also important to consider, having a health care power of attorney. This would come into play if something happens to you medically because it would already be designated who would then consult with a doctor on your behalf.
A financial power of attorney, similarly to a health care power of attorney, would then allow a designated party to make financial decisions on your behalf.
WHY WOULD THIS BE IMPORTANT?
Let's just say that you and your spouse each have your own retirement accounts, and one of you gets in a bad car accident. You now need access to your spouse's retirement account to pay some upcoming bills.
While any financial institution that follows the laws would not let you make withdrawals from your spouses account. If they did they would get in serious trouble. In order to access the account you would need financial power of attorney to be able to make those withdrawals
By having everything already filled out before an accident happens it can make your life a lot easier. On the flip side, if you don't have that done, you would need to go through a court process. Which can talk a long time.
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While these are the 7 money moves I would strongly consider everyone making. You don't need to make all of them. Even adopting just one or two would really help you get set up for success in 2025.
If you have a question or topic that you’d like to have considered for a future episode/blog post, you can request it by going to www.retirewithryan.com and clicking on ask a question.
As always, have a great day, a better week, and I look forward to talking with you on the next blog post, podcast, YouTube video, or wherever we have the pleasure of connecting!
Written by Ryan Morrissey
Founder & CEO of Morrissey Wealth Management
Host of the Retire with Ryan Podcast