You'll be able to approach retirement more confidently if you tackle these key tasks.
If you're at the point where you're two years away from retirement, you may be ready to start your weekly countdown. After all, each week you wrap up on the job gets you closer to your goal.
But it's really important to tackle certain financial moves when you're about two years from retirement because if you discover that changes need to be made on your part, you still have the time to pivot. Here are three such moves you'll want to prioritize.
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1. Make sure you're invested in an appropriate manner
During your working years, it's a good idea to go heavy on stocks in your 401(k) or IRA. You need your portfolio to enjoy aggressive growth and have plenty of time to ride out stock market downturns.
But as retirement approaches, it's important to shift over to safer investments that are less volatile, like bonds. Remember, you'll likely be tapping your nest egg on a regular basis once your career wraps up. You don't want to end up overly invested in stocks because if the market tanks, you might lock in serious losses by taking withdrawals.
If you're two years from retirement, look at your asset allocation and consider rebalancing, as needed. Also, make sure the stock portion of your portfolio is well-diversified.
2. Move some money into cash
Keeping your retirement savings in cash is a poor choice during your working years because you're likely to generate a much higher return on your money with stocks. But as retirement nears, it's a good idea to move one to two years' worth of anticipated living expenses into cash. That way, if the market underperforms, you won't necessarily have to tap your portfolio to cover your living costs.
Plus, you never know when your portfolio might have a rocky month despite the broad market being stable. Having that cash on hand will give you the leeway to leave your investments alone when it's not the optimal time to tap them.
3. Figure out how much annual income you can get, based on your account balance
You may be approaching retirement with an $800,000 IRA or a $1.4 million 401(k). These are large numbers. But it's important to translate them into an annual retirement salary. That way, you can see what expenses you can (or can't) afford to take on.
For many years, the convention was to withdraw from savings at a rate of 4% a year. However many financial experts are moving away from that advice and suggesting a more conservative withdrawal instead, based on factors that include increased age expectancies and today's bond interest-rate environment.
Figure out what withdrawal rate you're comfortable with, and then see what it means from an annual income perspective. If that number is lower than what you expected, you can make adjustments in your head, such as gearing up to downsize to a smaller home. That way, those changes won't feel so harsh when you actually have to make them as a retiree.
You may be getting more and more excited to retire by the day. But tackle these essential moves sooner rather than later so you can approach your retirement with even more confidence.
