Dreaming of turning in your notice at work and joining the ranks of retirees?
Retirement can be great — if you’re prepared for it. Therefore, before putting an end to your career, it is necessary to make sure that you are 100% ready.
Not sure how to do this? Taking these five steps can put you on the road to a happy and secure retirement.
1. Tune in with your spouse
If you’re part of a couple, retirement doesn’t just affect you. it’s a profound lifestyle change for your entire family. Before you take the leap, get on the same page with your spouse.
Will you both retire or will your spouse work longer? If your spouse plans to maintain a career, will you end up being responsible for more household chores — and are you okay with that? These questions must be answered.
You should also consider how your decision will affect your family’s finances — especially when it comes to Social Security benefits. If you claim Social Security benefits early, you’ll reduce the monthly benefits you get for the rest of your life — as well as any survivor benefits your spouse might receive if they outlived you.
Plan a Social Security claiming strategy with your spouse before you apply for benefits that maximizes your combined income, since you can’t easily change your plans once benefits begin.
2. Figure out where your income will come from
When you no longer have a salary, you will need funds from other sources.
For most people, retirement income comes from Social Security and savings. A lucky few – mostly government employees – have a defined benefit plan to provide guaranteed income. For the rest of us, it’s necessary to invest enough money to supplement Social Security.
To make sure you don’t fall short, add up all the possible sources of retirement funds — from pensions, Social Security, and withdrawals from retirement accounts like 401(k)s and IRAs — and figure out what your total monthly income will be.
Calculate your Social Security income by going to mySocial Security to find the amount of your benefits at full retirement age. Once you’re logged in, there’s a free retirement estimator to help you determine what your benefits will be based on your retirement age. If you’re not ready to set up an account, the SSA also has a quick calculator to estimate benefits by entering your current year’s earnings, your date of birth, and your future retirement date.
To determine the income you will receive from investments, you could use the 4% rule, which allows you to withdraw 4% of your account balance in the first year of your retirement and then adjust that amount withdrawal each year based on inflation. However, there’s a chance you’ll run out of money following the 4% rule, so you may want to take another tactic, such as following expert advice from the Center for Retirement Research to determine what percentage of your account balance you’ll withdraw annually.
When you add up your Social Security income, investment income, and any other money you have coming in, you can make an informed choice about whether it’s possible to live on the available funds.
3. Set a retirement budget and see if there is a deficit
So how do you know if your total income will be enough to support you?
The best way to figure this out is to actually make a budget. Consider all your fixed costs, such as housing, taxes and insurance. Add other expenses such as travel, clothing, personal care items, transportation, food and entertainment. And don’t forget to include saving: Just because you’re no longer investing for retirement doesn’t mean you don’t need to set aside money for other purposes, like home repairs or emergencies.
Your budget will reveal how much money you will actually need. If it shows you’ll have plenty of income to cover everything, you’re good to go and you can hand in your notice.
If it doesn’t, decide between lowering your retirement expectations or increasing your retirement income by working more, saving more and earning late retirement credits to boost your Social Security benefits.
4. Make a health care plan
One of the big line items in your budget will be healthcare costs.
Seniors often suffer from serious medical conditions, and Medicare does not provide the comprehensive coverage that most people think. You will have to bear a lot of prescription costs yourself. you will pay the premiums and coinsurance costs. and you will need to pay entirely out of pocket for care that is not covered, such as nursing home services.
Recent estimates show that an elderly couple in the top percentile for prescription drug use would need $370,000 to be reasonably certain of meeting their health care needs in retirement. If you don’t have that much, explore options like working more and investing in a health savings account or buying the most comprehensive Medicare Advantage and long-term care insurance available.
5. Think about how you will spend your time
Finally, you need to think about what you will actually do during retirement. Some older people suffer from health problems, including depression, when they lose their sense of community and purpose. Have a plan to reduce the risk of being lonely and disconnected from the world after retirement.
Depending on your interests, this plan could include volunteering with local organizations, joining a senior center, taking care of your grandchildren, joining a travel group or exercise classes (seniors can often join a gym for free through the SilverSneakers program Medicare). You could also do some part-time consulting work, either for pay or through volunteer organizations like SCORE.
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Are you ready to retire?
If you’ve gone through these five steps and still feel ready to retire, congratulations! Hopefully, you’ll have the savings you need to enjoy your golden years.
If you’ve found that you’re not ready yet, take heart — you’ve taken the important step of identifying the tasks you need to complete, and you can start checking things off your to-do list.
CNNMoney (New York) First published August 20, 2018: 10:19 am ET
