What is pre-retirement, and why consider it?

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If you’ve never heard the term pre-retirement, you’re in good company. Monica Scudieri, author of the forthcoming book Grab Your Slice of Financial Independence, never really thought much about retirement, let alone the “pre-retirement” stage, until she was a few years away from quitting her 9-to-5 job.

“I got divorced at age 40, and suddenly my finances were a crisis to be addressed,” she explained. “Divorced, two preschool-aged kids, and $257k of debt. Nerve-racking would be an understatement.”

But instead of getting overwhelmed, Scudieri decided to get organized. “I sold the house and downsized,” she said. “Then I started implementing my plan to purchase rental properties (five in 3 years), plus funding my 401(k) — and I opened a Health Savings Account and a rainy day fund.”

Scudieri’s pre-retirement may not look like yours, but putting a plan together for the last few years before you retire is an integral part of making a smooth transition to your next chapter.

Here’s what you need to know about pre-retirement and how you can make the most of the years before you retire.

What is pre-retirement?

Pre-retirement refers to the period of time between your decision to retire and the actual day you hang up your hat.

When you decide to retire and set a tentative retirement date is an ideal time to start getting your retirement plans in order. Your next chapter is on the horizon, but you have enough time beforehand to take care of any current gaps in your financial, healthcare, housing, or other post-retirement plans.

In a perfect world, every pre-retiree would use this important time period to prepare for their coming transition, but Jeremy Keil, CFP®, CFA with Keil Financial Partners and host of the Retirement Revealed blog and podcast, explains that a lot of people get put off the important work they need to do during this time.

“A common mistake I see is pre-retirees delaying decisions about retirement, not getting necessary information about pensions and Social Security, and not meeting with a retirement-focused financial advisor,” Keil said.

Preparing financially for retirement

Rather than let the important pre-retirement years slip away from you, Keil recommends figuring out what your retirement finances will look like.

“Start by thinking how much you will spend in retirement,” he said. “Don’t create a budget — you’ll inevitably underestimate. Instead, look at your current take-home pay. Generally, what goes in your checking account gets spent.”

Of course, that’s not all you need to account for in your retirement spending plan. Keil explains that you will likely have several line items to plan for:

  • Regular lifestyle spending. You can use your current take-home pay to roughly estimate this line item. Remember, this spending goes up with inflation and lasts as long as you do.
  • Healthcare costs. These costs can be difficult to project, but Fidelity estimates that a 65-year-old couple retiring in 2022 can expect to spend $315,000 on healthcare in retirement. You can either use this baseline calculation or calculate your current annual healthcare costs and assume those costs will go up with inflation (if not more) and last as long as you do.
  • Taxes. Ending your career doesn't end your obligation to pay income tax (property and other taxes). These go up with inflation (hopefully not more!) and last as long as you do.
  • Mortgage. If you carry a mortgage into retirement, that annual cost doesn't increase at all, and goes away eventually.

Using these line items, you can create a rough estimate of what you will spend annually in retirement.

From there, you can compare that number with your potential annual drawdown of your current retirement savings, plus any pensions and Social Security benefits you can expect, to see if you’re close to where you need to be financially for retirement.

“If you can’t afford to spend that amount in retirement,” Keil said, “then consider working longer or finding ways to spend less.”

Building flexibility for retirement

Keil also wants more workers to use their pre-retirement years to prepare for contingency situations, since your retirement decisions aren’t always entirely up to you.

“People often retire earlier than expected and live longer than they plan for,” Keil said. Finding yourself involuntarily retired before your target date could be either a welcome early start to your retirement or a major financial crisis, depending on how you have planned for your retirement finances.

For instance, Keil often sees pre-retirees investing aggressively until their target retirement date. 

“I met plenty of workers who planned to retire at the end of 2020, freaked out when the market dropped in March 2020 and moved to cash, hurting themselves and their retirement,” he said.

Their mistake was thinking that they should invest for full-tilt growth right until the day they retired.

“It should really be a gradual shift,” Keil explained. “If you set up your plan as if you are retiring 3 years earlier than you expect and will live 5 years longer than you think, you’ll be doing yourself a huge favor!”

Getting the retirement timing right

Pre-retirement is also an excellent time to figure out the best time to take pension and Social Security benefits in retirement.

While you might assume that you must take these benefits at the same time you retire, Keil warns that you might be leaving money on the table by doing that.

"Your choice on which box to check and when to take your pension and Social Security could make or break you to the tune of hundreds of thousands of dollars," he said. "Start doing the research ahead of time by using Social Security calculators, longevity estimates, and getting multiple estimates on your pension so you can time your benefits right."

That doesn't necessarily mean working longer, either. "You can retire one day and start your pension at another time," Keil said. "Find out how your pension changes by getting estimates for 1, 2, 5, or even 10 years into the future after your retirement date. It's not a matter of working an extra year–it's a matter of finding out when to start your pension to maximize your lifetime income."

Preparing for your life post-retirement

While most pre-retirement advice focuses on getting your financial house in order, Scudieri also recommends thinking about what your days will look like post-work.

“I wish I spent more time thinking about what I would be doing with my time after quitting,” she said. “There is a lot to process, and I wish I had given myself that time to slowly transition to my next chapter.”

That’s why Scudieri recommends laying the groundwork for your day-to-day retired life while you’re still in the pre-retirement stage.

“Build a support system of friends outside of work before quitting. Try new hobbies. Plan travel. Set a new schedule. Join a book club or running or biking club,” Scudieri said. “Whatever ‘it’ is, start trying out stuff before quitting. Establish activities that get you excited about the next chapter.”

Emily Guy Birken
Personal finance writer

Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial topics relatable and easily understood by the layperson. Her work has appeared on The Huffington Post, Business Insider, Kiplinger's, MSN Money, and The Washington Post online. She is the author of several books, including The 5 Years Before You Retire, End Financial Stress Now, and the brand new book Stacked: Your Super Serious Guide to Modern Money Management, written with Joe Saul-Sehy.

Emily lives in Milwaukee with her family.