Retirement is one of the biggest milestones you'll experience in life. You probably already know how you want to spend your days of freedom, but it's important not to rush into them. If you want your retirement to last, you need to make sure you're financially ready. Here are three questions you ought to know the answers to before you quit the workforce for good.
1. What's my retirement withdrawal strategy?
Retirement means living off of your savings for an undetermined amount of time. This makes it a challenging goal to save for, but those who do best are the ones who have a solid withdrawal strategy in place that aligns with their goals.
You may have heard of the 4% rule. This says that you should withdraw 4% of your retirement savings in the first year of your retirement and then adjust this amount for inflation every year thereafter. Ideally, it's supposed to help your money last 30 years. But it doesn't always pan out. It also doesn't take into account that some retirees spend more in the early years of their retirement and less as they age.
Because of these shortcomings, people have come up with several alternative withdrawal strategies over the years. One is the 3% rule, which is the same as the 4% rule, except you start by only withdrawing 3% of your retirement savings.
Others budget extra money for the early years of their retirement so they can travel or spend more on hobbies and then plan to get by on less as they age.
There is no obvious right answer when it comes to how to ration your retirement savings, but it's important to have some kind of strategy in place before you retire. Otherwise, you risk running out of money prematurely.
2. How much will I get from Social Security each month?
Your Social Security benefit will probably form an important part of your retirement budget, so you need to have an accurate idea of how much you'll get from the program. The simplest way to do this is to create a my Social Security account. This gives you personalized estimates of your monthly benefit at various starting ages based on your work history.
If you planned to just sign up for Social Security once you retire, you may want to rethink that. Every month you delay Social Security increases your checks until you reach the maximum benefit at age 70. Those who live into their 80s or beyond usually get more money overall by delaying benefits than they do by signing up early.
But signing up early could still be the right decision for you. It all comes back to planning. If you've accounted for slightly smaller Social Security checks in your retirement plan, you may not run into any problems. But if you were overly optimistic in your Social Security estimates, you may want to either rethink your withdrawal strategy or delay retirement a little longer to give yourself more time to save.
3. Have I budgeted enough for healthcare?
Most seniors will be able to rely upon Medicare to cover some of their health expenses once they turn 65. But Medicare has a lot of gaps in its coverage, so you still need money of your own that's earmarked for healthcare costs.
The average 65-year-old couple retiring in 2021 would need about $300,000 to cover their medical costs, according to Fidelity -- and that assumes they don't need any special services, like long-term care. Those retiring in 2022 or later will probably need even more than this as inflation continues to drive up all costs, including medical expenses.
Even if you consider yourself to be a healthy person, it's important to build healthcare costs into your retirement plan because you never know what health problems may arise in the future. If you forgot to budget for medical expenses, it's probably a good idea to put off retirement for a while until you have the money to cover this.
It's also worth noting that if you retire before age 65, you won't have access to Medicare so you'll also have to pay for an individual health insurance plan in the interim. It's not a good idea to skip health insurance because all it takes is one injury to wipe out a large chunk of your savings.
You probably don't want to delay retirement, especially if you've had your retirement date marked on your calendar for years. But retiring unprepared could create financial problems down the road. So look over your retirement plan and try to poke holes in it if you can. If you find any, consider putting off retirement until you've fixed them. The more prepared you are, the more likely you are to enjoy a comfortable retirement.