Are You Truly Ready to Retire?
Have you dreamed about what you will do with your time in retirement? Thoughts of traveling abroad and spending time with grandchildren may come to mind. Even simple pleasures like gardening or starting a book club could make the list. You will finally have time to plan for activities you’ve been putting off and time for some well-deserved relaxation. But do you have a plan for your financial future?
Too often people are so eager to leave their jobs behind, they haven’t thought about every aspect of retirement planning. What sources of income will you have in retirement? Will your expenses increase or decrease? How will you plan safe withdrawals from your accounts? Which accounts would you take from and when? How will your money be taxed? Do you have strategies in place to minimize taxes in retirement? Still have debts that need to be paid off or expenses you anticipate (new roof, or car)? Have you developed power of attorney documents?
These questions may conjure up stressful thoughts but are important to ask and answer. Here are some ways to determine if you are ready for retirement?
First, start with a monthly budget including income and expenses. Keep track of how much you spend in all categories for at least a year before you think about retiring. The practice of budgeting will also show how much you are spending on things you might not need. One common formula is to plan to live off 75% of your pre-retirement income to maintain a similar lifestyle. Expenses will change in retirement since you won’t be going to work and presumably won’t spend as much on gasoline, business lunches, clothing or dry cleaning, etc. However, you might be spending more in other categories, such as travel and healthcare. If the thought of limiting your spending to only 75% scars you, it could be a red flag that you may not be ready.
Second, gather up your statements for retirement accounts (401k, IRA, Pension, Social Security or Annuities). Next, determine your cash flow needs based on the monthly expenses. When meeting with your financial planner, discuss when to take Social Security, and when to start withdrawals from other accounts. Keep in mind that the IRS will collect taxes on withdrawals, and it’s important to have a strategy in place to minimize taxes.
Third, develop a long-term financial plan and know how long your money will last. If you retire at 65 and live until you are 95, then your money needs to last 30 years. As part of your plan, you may opt to work part-time in retirement as well and delay taking social security. Consider the cost of long-term healthcare in that plan. Today the average cost of a nursing home is $6,800 per month for semi-private room and assisted living averages $3,600 for a one-bedroom unit. Does your plan account for those expenses?
Fourth, update your wills and estate plans. Have you developed a revocable trust? Creating a revocable trust allows you to dictate your plans, including who will manage your finances and provides the added benefit of privacy. Also, everyone should have a durable and healthcare power of attorney. The durable power of attorney authorizes another person to act for you financially. The healthcare power of attorney (aka Advance Directive) authorizes another person to make end of life decisions in the event of incapacity. Spouses should discuss each other’s wishes regarding medical treatment and put provisions in writing.
Taking time today to develop a realistic plan will increase the probability of a successful transition into retirement. Adjustments can be made along the way. Ask for a copy of our Retirement Blueprint Checklist, which is a great outline for your comprehensive financial plan.