I’ve been thinking, planning, and writing about retirement for quite some time. It seems to me that many people think of retirement as a binary decision – either yes I am or no I’m not. It seems to me that retirement planning is needed before AND during retirement. Rather than thinking of it as a binary event, we would be best served by considering the multiple stages of retirement. If you’re financially prepared and physically healthy, retirement can last for decades. The different stages that make up your retirement have different expenses and require distinct approaches to budgeting. Even with a shorter retirement, you’ll go through the same stages, just in a condensed time frame. These four stages are pre-retirement, early retirement, middle retirement, and late retirement. Here’s what the first stage looks like and how to handle your finances accordingly.

Stage 1 -“Pre-Retirement” (50 to 62)

Pre-retirement is the stage just before retirement. You’re still working, but slowing down is in the near-enough future that you’re finally getting a clear picture of what your nest egg, income, and expenses will look like. Perhaps the kids have gotten through college and are now out on their own (watch out for boomerangs). You’re also getting closer to figuring out what you’ll do with your days once you’re free to fill them as you please. What seemed merely theoretical earlier in your working life starts to seem real. We put age 62 on it, the age when people first qualify for reduced Social Security payments. But you might retire at 60 or keep working past 70.

At this stage, you should honestly assess what your likely income and expenses will be once you’re no longer in the workforce. What will you receive from a pension or Social Security? What is the balance in your retirement plans, such as 401(k)s, 403(b)s or IRAs? And how much will you be able to comfortably withdraw each month? Will you have paid off your mortgage already, and if not, how much will you still owe and for how long? 

You may or may not be in a strong enough position to seriously evaluate whether you can afford to retire early. Your employer might downsize and you might find yourself considering whether to accept a buyout. If you run a family business, this is a good time to create a succession plan. And if you aren’t where you want to be financially, it’s a good time to work more, change jobs, or actively pursue a promotion so you can earn more and save more for retirement while you have the chance. 

Pre-retirement is also a good time to reevaluate your monthly and annual expenses and cut back on costs that have crept up over the years to eliminate any wasteful spending and give your retirement budget some breathing room. Finally, you might want to replace your usual vacations with trips to places you’ve envisioned yourself moving to during retirement.

Stay tuned next week to learn how to properly handle the ins and outs of the second and third stages of the retirement process, while taking full advantage of both your time and money.

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