Are you thinking about retiring? If so, there are a few crucial financial decisions that you're going to need to make first in order to be sure you'll have enough money to live on and won't put your future retirement security at risk.
In particular, there are three questions you absolutely must answer before giving your notice and departing the world of the working for good. Here's what they are.
1. How much money you'll take out of your retirement accounts
Two factors determine how much retirement income your investment accounts will produce:
- The amount you have invested
- Your withdrawal rate
The withdrawal rate is the amount you take out of your account every year. A lower withdrawal rate reduces your income, but also reduces the likelihood that you'll run out of money before you die. A higher withdrawal rate could put you in jeopardy of outliving your retirement savings, but it provides a larger income with a smaller nest egg.
You'll have to think about your likely longevity, and how much risk you're willing to take of running out of money, when you decide on a withdrawal strategy that works for you. It's best to make this decision early, as this can help you estimate the account balance you'll need.
2. Where you'll spend your retirement
Your chosen retirement destination will have a huge effect on your finances for a few key reasons:
- Cost of living varies across the United States, and even in different parts of each state
- Tax rules differ across states, with some states taxing Social Security benefits, and others charging no income tax at all
- Some places are more walkable than others, allowing retirees to forgo the expenses associated with vehicle ownership
- The type of house or apartment you live in can affect your costs
If you plan to live in an expensive city or want to continue to reside in your expensive family home in the suburbs where you're car dependent, you'll need much more money to retire comfortably than if you opt for life in a cheap area with low taxes that's walkable.
Of course, your decision about where you live has huge implications for your quality of life. You may want to stay near family or friends or live someplace that's a cultural mecca -- even if that means you'll need a larger nest egg. You'll need to know this when making retirement plans so you can base your financial goals on the costs you'll incur in your preferred destination.
3. What you'll do with your time
How you'll spend your days is going to affect the amount of money you'll need.
If you plan to work part-time, this can supplement your income so you may need less savings. But if you intend to travel or indulge in expensive hobbies, more savings will be crucial.
Having a plan for your time in retirement will also ensure you aren't bored or regretful of your decision to leave work.
By considering these three issues, you can be better prepared for retirement in the future -- and can make the right choices about whether you're really ready to leave the working world.