Making the decision to leave the workforce for good is a big commitment, as it can be difficult or impossible to return to work after you've entered retirement. Before you decide to move on to the phase of your life where you no longer earn a living, you need to be sure you're 100% financially ready. 

Running out of money late in your retirement is a financial and personal disaster, so before you give up the working world for good, make sure you have answers to these three key questions to determine if you're really prepared for retirement. 

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1. What will your estimated income be?

When you retire, you'll no longer receive a steady paycheck from your employer. Defined benefit pension plans, where companies give employees a guaranteed amount of money after retirement, are rare today and are mostly available to public-sector workers. Everyone else will be reliant on Social Security benefits and savings for support during retirement. You'll need to know exactly how much income you'll have from these sources.

Calculate your estimated income in retirement by visiting your Social Security account online to find out your expected benefit and adding this number together with other sources of income. Be aware your projected Social Security benefit could be reduced -- for life -- if you retire before full retirement age, or could increase if you wait longer to claim your benefits. You should also have additional income on top of your Social Security benefits, as trying to live on Social Security alone puts your income right around poverty level if you earn average benefits. 

Your investments should produce income for you to add to your Social Security benefits, but you don't want to draw them down too quickly. Traditionally, the rule of thumb was that you could withdraw around 4% each year without running out of money. But, lower interest rates, longer life expectancies, and other factors mean you put yourself at risk of running out of money if you actually take out 4% annually. Instead, keep withdrawals to around 3% of your savings, or work with a financial planner to create a customized withdrawal schedule. 

Once you've got your combined income calculated -- including Social Security and money from investments -- you'll know what you have to live on during retirement. Compare that amount with what you expect to spend. Do you have enough? If not, are you willing to scale back your expectations or can you work longer to raise your Social Security benefit and save more?

2. What taxes will you have to pay on your retirement income?

Many seniors are surprised to find their retirement income is taxable. If you withdraw money from a Roth IRA, you won't have to pay taxes as long as you follow rules for withdrawals.  But, if you take money out of a 401(k) or a traditional IRA, you'll be taxed at your regular tax rate based on your total annual income. 

You may also have to pay taxes on your Social Security benefits, depending upon your income. Your adjusted gross income, for purposes of determining if you'll be taxed, is calculated by adding up one-half of your Social Security benefits with all other taxable forms of income, including 401(k) and IRA distributions. If you're a single filer and your adjusted gross income exceeds $25,000, or if you're filing jointly with a combined gross income of $32,000 per year, your Social Security benefits will be taxed. If you're married but filing separately, your benefits are always taxable. 

Up to 85% of your Social Security benefits could be taxed if your income is high, and you may also have to contend with state taxes on top of federal taxes, unless you live in one of the states that doesn't impose these taxes. Determine what your tax burden will be during retirement to calculate how much income you'll actually have left over to cover your expenditures once the tax man is paid. 

3. How are you going to cover healthcare costs?

Many retirees make a budget based on living a comfortable lifestyle and even traveling a bit -- but they leave out one big expense: healthcare costs. It's a common misconception that Medicare covers everything you need, but this couldn't be further from the truth. The government covers just about 65% of medical expenditures for seniors, while seniors face average healthcare spending of close to $19,000 each year.

Medicare Advantage Plans and Medigap cover some costs Medicare doesn't pay for, but buying supplementary Medicare plans also costs money. And, even with these plans, seniors may need as much as $350,000 during their retirement to cover healthcare needs if they are high consumers of prescription medications. 

Make plans to pay for at least the average spending on healthcare, which was around $5,994 in annual out-of-pocket spending for seniors as of 2016.  If you're already taking costly medications for a chronic condition or if you have a family medical history that predisposes you to become a high consumer of healthcare, err on the side of saving much more. 

As you consider retirement, calculate your Medicare Advantage or Medigap premiums, look carefully at what care is actually covered, and consider whether your retirement savings stretches far enough to get the care you need. If not, staying in the workforce longer to save more for medical care -- and ideally investing in a health savings account to pay for care with tax-free funds --  could be the only way to protect yourself from financial calamity later in life. 

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