3 things to do with your money now if you're planning to retire in the next 3 years, according to a financial planner (2024)

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• As a financial planner, I prepare individualized retirement plans for all kinds of people. But for clients who are nearly ready to retire, there are three things I frequently recommend.
• Start by paying off your mortgage before you retire — freeing up that cash will help support you once you're no longer earning a regular paycheck.
• Setting aside two years' worth of expenses will help you pay your bills if you enter retirement during a down market, and adjusting your asset allocation in advance of retirement will ensure you're not taking on too much risk.

There are many factors to consider when developing a retirement income plan, such as the cost of living in the area where you intend to retire, whether you will receive a pension or some other lifelong income stream, and your expected longevity. And though a retirement income plan should be as unique as the person(s) it belongs to, there are some key tenets that are universal and can benefit almost anyone.

If you're getting ready to retire this year, here are three things you can do to help ensure a smooth financial transition.

1. Get rid of your home mortgage once and for all

The value of retiring debt-free could never be overstated — especially when referring to unsecured, high-interest debts like credit cards and personal loans. Those types of debt are unproductive and do not provide any valuable tradeoffs. However, it is also important to focus on so-called "good" debt that is tied to an asset, such as an auto loan or home mortgage.

Housing is most people's largest living expense by far. For the majority of homeowners in the US, the mortgage accounts for more than 40% of the overall household budget. So, cutting this number down to zero would have an outsized impact on someone's ability to sustain their lifestyle living on a fixed income. By that math, it is safe to infer that you would only need about 2/3 of the income you needed prior to paying off the mortgage.

Of course, there are other costs associated with owning your home that continue even after the mortgage has been paid off. However, those costs pale in comparison to the tens of thousands of dollars that go to a family's home mortgage on an annual basis that could now either be saved or repurposed elsewhere.

2. Set aside 2 whole years' worth of expenses in cash

A key step in planning for retirement is to write out a list of your fixed and variable expenses. Then, go line by line and assess whether you expect each expense to continue into retirement or drop off once you are no longer actively employed. For instance, health insurance is a fixed expense that will continue even after retirement, whereas commuting-related expenses should virtually disappear. Once you have determined which costs are here to stay, simply add those up and that final number is your needed retirement income.

Step two is to figure out how much of your income in retirement will come from fixed, predictable sources, such as pensions and Social Security. Then, subtract the total of those fixed income sources from your needed retirement income figure in the previous step. Whatever the difference is between those two steps, you will want to have in cash.

In fact, I advise clients to hold two whole years of expenses in cash prior to retirement so that regardless of what the market does in the immediate term, they will not have to worry about income. Having an entire two years' worth of living expenses spoken for on day one of retirement will also keep you from panic-selling investments at market lows if there is a downturn in the early days of your retirement.

3. Review your asset allocation and make sure you are comfortable

Two to three years prior to retirement, it is advisable to ask yourself whether you will still need to take on as much risk as a retiree as you are as an active employee. For many, it will make sense to dial down the risk associated with your overall investment portfolio as you shift from an asset accumulation mindset to one of asset preservation. For others, the risk of retiring into a down market is not so scary, and they believe they have enough mettle to weather any storm.

As you perform your pre-retirement risk assessment, it is important to keep in mind that these are irreplaceable assets. If you were to open your account statement one day and see that 10, 20, or 30% of your retirement assets have disappeared in another 2008 or 2020 style market downturn, would you act on your initial impulse to sell? If the answer is anything close to yes, then it is likely a good idea to begin dialing down exposure to risky assets like stocks well ahead of time.