Many people rush into retirement only to regret that decision after the fact. If you're gearing up to leave the workforce for good, make sure you can answer these important questions first.
1. What will my monthly retirement income look like?
You might have a number of income streams at your disposal during retirement, from Social Security to personal savings to money from a part-time job. The key, however, is to figure out how much monthly income to reasonably expect, and determine whether it'll be enough for you to live comfortably on.
If you're close to retirement, estimating your Social Security benefits is pretty easy. Just take a look at your most recent earnings statement from the Social Security Administration (if you don't have a paper copy, you can get it online) and see what your monthly payments look like. Keep in mind that the age you claim benefits at could cause that number to change, but at least you'll have a ballpark.
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Next, assess your nest egg. As a general rule, you can aim to withdraw about 4% of your savings balance each year and not run out of money for about 30 years. Therefore, if you're sitting on $500,000 in your IRA or 401(k), that gives you $20,000 of annual income, or $1,667 per month.
Finally, think about the work you'll do. Will you be getting an actual job, monetizing an existing hobby, or starting a business? Or will you not work at all? Either way, do your best to land on an estimate, and then tally up your various sources of monthly income to arrive at a total.
2. What will my monthly living expenses entail?
Once you've determined what your monthly retirement income will look like, you'll need to see how that number aligns with your anticipated spending. To this end, create a retirement budget that maps out all of your ongoing expenses, from housing to food to transportation to Medicare premiums, and see what your total looks like. If your anticipated income is enough to cover your costs, then you're in good shape. Otherwise, you may need to either delay retirement or adjust your expectations to avoid financial troubles.
3. How will I actually spend my days?
Boredom can be a serious problem during retirement, especially when it paves the way to mental health issues. In fact, retirement increases the likelihood of suffering from clinical depression by 40%, according to the Institute of Economic Affairs, and a big reason for that boils down to seniors feeling like they no longer have anything meaningful to do with their time.
That's why it's crucial to have a specific plan for retirement. Maybe you'll spend half of your newfound free time volunteering, and the other half on hobbies and home projects. Or maybe you'll travel for one week each month, and spend the remainder of your time taking classes, playing golf, and bonding with your grandchildren. The choice is yours, but make sure you know how your days will be filled before leaving your career behind.
Just as importantly, make sure your finances can support that plan. If you don't have the income available to do the things you really want to do, it could make sense to put off retirement a few more years, work a little extra, and boost your savings to buy yourself more options.
The last thing you want to do is retire when you aren't truly ready. Make sure to thoroughly answer these key questions before bringing your career to a close. Otherwise, you could wind up cash-strapped, bored, and disappointed once your golden years kick off.
