The years leading up to retirement are the most important in planning for your retirement. There are 5 major reasons why these years are essential for a successful retirement plan.
Reason #1: Compound Interest
The first reason these years are so important is the power of compounding interest. Compound interest is the interest earned not only on your initial investment but also on the interest earned from previous years. The more time you have to save, the more you can take advantage of compounding interest. The last few years before retirement offer an opportunity for compound interest to work its magic on your investments. This period is when you have the most flexibility to save; you no longer have to worry about expenses such as saving for college or a home. With proper planning and investing, your portfolio value could double in the last five years of your working career.
Reason #2: A Better Understanding
The second reason is that you gain a better understanding of what it will cost to retire. As you approach retirement, you start to get an accurate sense of what you want your retirement to look like. Your retirement expenses are one of the most critical variables in determining the success of your financial plan. Use these last few years to estimate what retirement might cost and refine your estimate to have a clear picture of what it will cost to do what you want to do in retirement.
Reason #3: Upfront Costs
In the years leading up to retirement, you have a chance to pay for the big things upfront. The last five years of your career could be some of your highest income years, and you can take advantage of that by prepaying for big expenses such as car purchases, roof repairs, etc. Doing this can help set yourself up for financial and emotional success, as you won’t have to pay for them during retirement on a fixed income.
Reason #4: Taking Advantage of Insurance
The fourth reason, similar to the third, is using the years before retirement to take advantage of your employer’s insurance. If there are any medical necessities or procedures, doing them on your employer’s dime can save you money instead of doing them in retirement. Of course we can’t control our health, but getting check-ups and medical care can set us up to be as healthy as possible before retirement.
Reason #5: Start Dreaming
The fifth reason is that these years give you the chance to start dreaming about your retirement. There’s not as much on your plate, which leaves more time for you to understand what you need to do to get ready for retirement financially, personally and emotionally.
The last five years of your working career are a critical time to focus on retirement planning. These years offer a unique opportunity to take advantage of compounding interest, gain a better understanding of your retirement expenses, pay for big expenses upfront, take advantage of your employer’s insurance coverage, and start dreaming about your retirement and what you want it to look like. By taking a proactive approach to retirement planning, you can set yourself up for a comfortable, fulfilling retirement.
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