Making the choice to retire is a big decision with major personal and financial implications. Unfortunately, many people end up retiring too soon because they fail to consider some key financial issues that come back to bite them in retirement.
You don't want to leave the workforce before you're truly ready to do so, so watch for these three signs you aren't really ready to retire -- even if you think you are.
1. You don't have a plan for healthcare costs
There are many different estimates for how much healthcare could cost you as a retiree.
Fidelity research projected the average couple retiring in 2019 would need $285,000 to cover healthcare costs, not including long-term care, dental care, or over-the-counter medications. This estimate was based on a couple without employer-sponsored coverage with original Medicare, and it takes into account Medicare cost-sharing provisions as well as prescription drug costs and services Medicare doesn't cover. Meanwhile, the Employee Benefit Research Institute estimated a couple in the 90th percentile for prescription drug use would need as much as $400,000 to cover care costs incurred after age 65, assuming they had a Medigap plan as well as Medicare Parts A, B, and D.
These estimates are for out-of-pocket expenses above and beyond what Medicare pays for. What they both have in common is that they're very high. While it's difficult to predict exactly how much healthcare costs seniors will have to pay, experts agree that spending will total in the hundreds of thousands of dollars. If you don't have some plan to cover all these costs, you're going to be in really serious financial trouble when the time comes to pay for your healthcare.
Before you're ready to retire, make sure you have enough saved in retirement investment accounts, a Health Savings Account, or other savings to cover the medical expenditures you'll face if you get seriously sick. If you haven't budgeted a lot of money for healthcare, you may need to keep working for a few extra years to save enough.
2. You're planning to follow the 4% rule
Before retiring, you'll want to make sure your retirement investments can produce enough income for you to live comfortably so you don't run out of money too soon.
Many people assume they can follow the 4% rule to make this calculation. The 4% rule says you probably won't run out of cash if you withdraw 4% of your investment account balance in the first year of retirement and then adjust withdrawals upward to account for inflation each year. So, if you could survive on the income from Social Security and 4% of your savings, you may assume you're ready to retire.
The only problem is, the 4% rule was made in the early 1990s when life expectancy was lower and bond yields were higher. More recent analyses show about a 57% chance of running out of money if you follow this rule. The Center for Retirement Research recommends a different method of determining a safe withdrawal rate, which allows you to take out around 3.13% of your account balance if you retire at age 65. So, if you want to be really sure you're ready to retire, see if you can survive at a lower withdrawal rate. If you can't, you'll need to boost your investment account balance higher before leaving the workforce for good.
3. You haven't strategized your Social Security plan with your spouse
Many people who retire claim Social Security as soon as they stop working or as soon as they turn 62, whichever comes first. If you're going to claim your benefits right away, consider how your age will affect the benefits you're eligible for. If you claim before your full retirement age (FRA) your benefits will be reduced. If you claim before age 70, you'll forgo the chance to earn delayed retirement credits that boost your Social Security income even higher.
Deciding to claim Social Security benefits before maxing out your monthly income won't just affect you -- it could impact your spouse, too. When one spouse passes away, the other could face serious financial hardship. The good news is, survivors benefits can help lower-earning spouses maintain financial security when higher-earning partners pass away. Unfortunately, if you claim your benefits early, survivor benefits will also be reduced. So, if you want to make sure your widow or widower has enough cash, try to delay claiming Social Security so your beloved has the highest possible household income after you pass on.
If you aren't sure how your claim for Social Security benefits could affect your spouse's income, talk to a financial advisor to find out before you retire. Once you claim your Social Security benefits, it can be hard to undo the claim and any resulting reduction in benefits.
Of course, if you have enough saved that you don't need to rely on Social Security to fund your retirement, this won't be a concern, as you can retire and still wait to claim benefits, although this isn't the reality for many retirees.
Are you really ready to retire?
If you've got a plan for your healthcare expenses, you understand how claiming your benefits will impact your family's Social Security income, and your investments can produce enough income at a safe withdrawal rate, then congrats -- it's time to hand in your notice! But if instead, you find you aren't really ready, working a little longer can make a big difference in your future financial security, and it's often well worth doing.