Is this the year you finally retire? Do you have unanswered questions about retirement? I’m telling my clients who are close to retirement to answer these seven simple questions to make the transition easier. Even if you don’t plan to retire soon, it’s still smart to plan ahead.
1. How Much Money Can I Live On?
Knowing your monthly expenses is important to understand how prepared you really are and whether you’re financially ready to retire. Review your current expenses, and then think about what will change or remain the same after you retire so you create a fairly accurate estimate of your expenses post retirement.
Look at the different parts of your monthly budget, including regular spending, unanticipated, and irregular expenses. Focus on items that you expect to change. For example, health care and travel expenses might rise, but you’ll pay less for clothing and transportation. Remember to factor inflation into your calculations.
2. When I Retire, What Will My Income Look Like?
Will you work part time? Will you have a company pension? Are your retirement accounts structured properly and organized for future withdrawals? What is your Social Security plan? How about your investments?
If you qualify for Social Security benefits, your monthly benefit will be a fixed amount for the rest of your life based on your age when you begin taking your benefits. So, make sure to consider how your age affects the amount you receive — waiting could pay off for you in the long run.
3. What Is My Social Security Strategy?
Many people make the mistake of rushing to claim their Social Security benefits. Although they’re available for you when you turn 62, the amount you receive will be lower for every month you are shy of your “normal retirement age,” which is currently 66 and gradually rising to 67. Also, for every month you wait until age 70 to begin taking your benefits, your benefits will permanently increase. Your decision about when to take Social Security benefits doesn’t just affect you — it could continue beyond your death and affect your spousal benefits. If you can afford to delay taking Social Security benefits by a few years, it can be worthwhile.
For example, a retiree eligible for $1,000 a month in benefits at age 66 would receive $750 a month for the rest of their life if they begin benefits at 62, but their monthly benefit would rise to $1,320 if they can hold off until age 70.
For detailed information on your specific benefits, go to the Social Security website and explore “My Social Security.” Create an account if you don’t already have one, and get a copy of your up-to-date earnings statement. While you’re in there, make sure to review your earnings history information for accuracy.
4. Am I Financially Prepared To Retire?
Chances are, if you’re retiring soon, you’ve worked with a financial advisor to make sure this happens. If retirement is a few years out yet, make sure to consult one as soon as possible to firm up a solid plan that allows your finances to match your retirement expectations. However, if you’re going it alone without an expert, start with your projected retirement income and expenses, without factoring in your retirement savings. The gap between your earnings and expenses in retirement is what you’ll need to fund with your retirement nest egg.
A critical piece of information here is your assumed rate of withdrawal from your retirement savings account(s). A so-called “safe” rate of withdrawal is 4% or 5% of your total each year, based on studies that show this withdrawal rate reflects a high probability of not running out of money after 30 or so years. To know how big a nest egg you’ll need to retire based on a 4% withdrawal rate, simply multiply your annual retirement income gap by 25.
For example, if you expect that you will need to draw $40,000 a year from your retirement savings to meet your income needs above Social Security, pension, or other income sources, you can conclude that you will need a $1 million nest egg ($40,000 x 25 = $1 million).
5. What Will I Do With My Time?
It may seem like an obvious question, but many people don’t consider it. Once you’re retired, what will you do all day? Some of the happiest people retire to something rather than from something. In other words, know what you want to do in retirement before you retire. What does your bucket list look like? How much will it cost? How will you attain satisfaction and happiness? Do you plan to mentor younger people starting out in your field? Volunteer your time elsewhere? Travel half the year? If you can’t answer these questions, you may not be ready to retire.
6. What Is My Backup Plan?
If things don’t work out exactly as you planned, think about how you would respond and be prepared with a plan B. Large unexpected expenses, miscalculating earnings, unpredictable financial markets, or any combination of these can throw off your expectations. In this case, you might face some hard decisions, such as: “Do I try to earn more income by going back to work or taking a part-time job?” Or: “What expenses could I cut if I had to?”
If you have a substantial amount of equity in a house, a reverse mortgage might be a part of your backup plan to generate funds. But those aren’t a quick fix and can essentially involve spending your children’s inheritance. Although you don’t need to pass rigorous credit checks, securing a reverse mortgage involves a tedious government process that requires credit counseling and could take six months to a year.
7. When I Retire, What Will My Income Look Like?
The key to a successful and happy retirement is good planning, having the right partners, and preparing for all potential scenarios. A good advisor will help you achieve attractive, riskadjusted returns on your investments over the long term while aspiring to preserve capital during times of market weakness. Your advisor can help you determine the right mix of investment products based on your objectives, return requirements, time horizon, and risk tolerance. So talk with your team at First Business Bank. We can help assure that you are prepared to transition into a fulfilling retirement.