Congratulations! After a long career, you're finally gearing up to retire, and it's a milestone you're no doubt excited for. But if you're convinced 2020 is the year you'll leave the workforce for good, be sure to make these key moves first.
1. Map out a budget
Having a budget is just as important during your golden years as it is for your working years. Without one, you'll risk overspending at a time in life when you should, if anything, be living more frugally due to being on a fixed income. Take a little time to figure out what your essential living expenses will look like in retirement, and then add in a reasonable amount for entertainment (technically not a necessity like housing and food, but important nonetheless). From there, you can see if your various income streams will allow you to maintain the lifestyle you want, or if you'll need to make changes to avoid spending too aggressively.
2. Assess your savings
Your retirement savings, combined with the income you receive from Social Security, will dictate how much money you can afford to spend on an ongoing basis. But it's easy to look at your portfolio balance, see a large number at the top of a printout or screen, and think you're set. In reality, you'll need to see how much annual income that balance allows for.
To do so, you can use the 4% rule, which assumes you withdraw 4% of your savings your first year of retirement and then adjust future withdrawals for inflation. The rule is designed to help your nest egg last a good 30 years. If you're sitting on $600,000 in retirement savings, a 4% withdrawal rate gives you roughly $24,000 in annual income, or $2,000 a month. Of course, you can apply a different withdrawal rate, too. The point is to get a sense of what your savings will actually allow you to spend on a monthly and yearly basis.
3. Develop a Social Security strategy
Social Security could end up being a pretty substantial income stream for you in retirement, so it's important to claim your benefits at the right time. If you file at full retirement age, you'll get the full monthly benefit you're entitled to based on your earnings history.
If you were born in 1954 and will be turning 66 in 2020, that's when you can claim your full monthly benefit. If you were born after 1954, your full retirement age doesn't kick in for another two to 12 months, depending on your precise year of birth, so make sure you understand when you can claim your benefit in full. While you are allowed to file for Social Security beginning at age 62, doing so will reduce your monthly benefits on a lifetime basis. And if you delay benefits past full retirement age, you can grow them by 8% a year, up until you turn 70, so it could pay to wait.
4. Know what you're doing about healthcare
As long as you'll be 65 by the time you retire, you can enroll in Medicare and use it for health coverage. But often, Medicare on its own isn't enough; many seniors need Medigap, or supplemental insurance, to make their costs more manageable. Keep in mind that Medicare doesn't pay for a number of key health services that seniors tend to need, like dental care, vision exams, and hearing screenings -- and supplemental insurance won't help you there, either. What could help, however, is opting for Medicare Advantage over original Medicare, because in that case, coverage for these and other services is generally on the table.
The takeaway? Read up on your healthcare options and see what type of plan makes the most sense for you. If you stick with original Medicare, you'll also need to choose a Part D drug plan, and that's a decision you don't want to take lightly.
5. Figure out what you'll do with your time
Boredom is a serious problem for retirees who, incidentally, are 40% more likely to suffer from clinical depression than workers. If you'll be going from a full-time work schedule to having open-ended days, you'll need a plan to avoid growing restless. Therefore, take a look at your expected income and see what sort of leeway it buys you. Maybe traveling every other month is out, but that doesn't mean you can't sign up to take classes or go golfing once a week. Another good bet? Start your own business. It'll give you something engaging to do, all the while helping you boost your earnings to buy yourself more entertainment options.
The better you plan for retirement, the more rewarding it's likely to be. Check these key items off your list if you're planning to leave the workforce in the coming year. And if you fear you're not ready, you can always change your mind at the last minute, which is a far better bet than going in unprepared and regretting it after the fact.