Retirement may seem like an ideal time of your life, but that's not the case for everyone. Some seniors face financial or personal struggles in their later years, often because they left the workforce before they were really prepared.
You don't want to be one of them. So before you give notice and give up the working world forever, answer these five questions to ensure it's really the right moment to retire.
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1. How much income will you have
Before retiring, evaluate all your potential sources of retirement income to see how much money will be available to live on. This could include:
- Social Security: You can find out the amount of your benefits by signing into your mySocialSecurity account. Be aware your age at the time you start your checks affects the amount of income you get from this source. Late filers bring home more money each month than early claimers.
- Pension income: Most people don't have guaranteed income from a pension, but some do -- especially those who worked for the state or federal government.
- Income from your nest egg: Withdrawals from a retirement account such as a 401(k) or IRA can supplement Social Security and pension income. But you'll need to select a safe withdrawal rate to avoid taking out too much money and draining your account balance.
While you may plan to work at least part time as a retiree, income from a paycheck could affect Social Security. Income from work could also be unreliable as a lack of job opportunities or health issues may affect your continued earning power. So be sure you're only factoring in guaranteed income sources when assessing the amount of money you'll have to live on in your later years.
2. Where will you live
Where you set up house in retirement is going to impact your cost of living as well as the taxes you owe. It's important to think about your preferred location before you retire.
If you anticipate a move that could make your costs go up, be sure you're prepared to pay the added expenses. On the other hand, if you think you'll cut costs by relocating to a less expensive area, think through the implications of a move with regards to your quality of life and relationship with loved ones.
3. What will your expenses be
Anticipating expenses can help you determine if your income will be high enough to cover them.
You may even want to go so far as to make a sample retirement budget and practice living on it to ensure the different income sources you have will really be enough to pay for the essentials.
4. How will you spend your time
Decisions about how you'll spend retirement affect both your quality of life and the money you'll require as a senior.
If you don't have a plan to fill your days, boredom and loneliness could leave you regretting quitting your job. On the other hand, if your plans involve expensive hobbies, you may need to rethink the amount of income you'll need.
5. Where will you get your medical coverage
Finally, consider how you'll pay for medical care -- especially if you won't yet be eligible for Medicare if you retire before age 65.
Keeping employer coverage through COBRA or buying individual insurance can both come at a high cost so research each of these solutions carefully to ensure you can afford your insurance.
And don't assume becoming Medicare eligible means you don't need to worry about out-of-pocket medical costs. Premiums for supplemental insurance, coinsurance and copays, and other out-of-pocket expenses can still be very expensive.
By answering these five questions, you can get a full picture of whether you're ready to meet your financial needs in your later years. If you discover you won't have enough cash to cover all you require, putting in some extra time at work could help ensure a better retirement.
