Retirement is about far more than just stopping work. It's a major transition to a new stage of your life. Once you retire, your source of income changes, your source of benefits like health insurance changes, and the way you spend large swaths of your time changes as well.
With all that change staring you square in the face, you'd better be sure you've got a good plan in place before you actually pull the trigger and retire. These five steps will help you make sure you're ready to retire before you take that leap.
No. 1: Get a handle on your Social Security benefit
If you're like most Americans, you're counting on Social Security to provide a significant portion of your retirement income. Your personal Social Security benefit is based on your own earnings record, and nobody knows with certainty what that benefit will be until you sign up to take it.
The best estimate of what you will get comes from Social Security itself, through an online My Social Security account (you can register at that link). Recognize, however, that even Social Security's projection is an estimate until you actually file. The statement Social Security generates for you online does a pretty decent job of describing the assumptions it uses, so read it carefully and adjust your own projections if necessary.
No. 2: Assure you have a path to health coverage and healthcare
If you're an American at least 65 years old, you can qualify for Medicare. That provides a decent foundation for your health coverage, but even then, only Part A (hospital insurance) typically comes without premiums for most participants in the program. Part B (medical insurance), Part D (prescription medication insurance), and any supplemental or Medicare Advantage coverage generally require premiums. In addition, you'll probably pay out-of-pocket costs for any care you receive as well.
If you're under 65, you'll need another path for your healthcare. Some companies offer retirees access to company supported plans or networks, but that benefit isn't as common as it used to be. Others offer retirees subsidies to retirees to buy their own insurance. Regardless of your personal situation, if you're under 65 and no longer have access to your employer's insurance, you need a way to assure you can get major medical issues covered if they arise.
One option open to Americans is individual coverage purchased on the Affordable Care Act marketplace. The net price you pay for such coverage varies based on your income and household size. To qualify for insurance through that marketplace, you either need to enroll during an annual enrollment period or close in time to a qualifying event -- such as losing your existing insurance.
No. 3: If you have a pension, choose how you'll take it
While pensions are less common today than they once were, many people close to retirement are still covered either by a legacy pension or have something left over from a former employer. If you're in that fortunate position, you'll need to make a choice on how to take your pension. There are a handful of directions you can go.
The most straightforward approach is to take the pension as a lifetime annuity stream -- a guaranteed payment for the rest of either your life or the longer of your life and your spouse's. Such payments are rarely indexed for inflation, or if inflation adjustments are available, they tend to be expensive options.
Another alternative commonly offered is a lump-sum buyout, based on an actuarial calculation of the value of that lifetime annuity stream. That option may be worth considering if you're decent at managing your own money or if you're worried about the pension's funding level.
No. 4: Convert your portfolio to a retiree-friendly asset allocation model
If you need to pull money out of your portfolio to cover your costs in retirement, you need to structure it so that you have a high certainty of getting the money you need when you need it. That means you'll probably want to hold cash, U.S. Treasury debt, and/or investment-grade corporate debt and have a way to replenish those assets as the bonds mature and the cash gets spent.
As a general rule, you'll want to keep at least five years' worth of expenses in those lower volatility and higher certainty asset types. While you'll sacrifice some expected returns for that move, you will improve the likelihood that your money will be available for you when you need it. After all, the last thing you want to do is to be forced to liquidate stocks when they're down simply because you have to raise cash to pay your bills.
No. 5: Know how you'll spend your days, weeks, and months
On top of covering your financial and healthcare needs, you should recognize that your job provides you structure during your days and a network of people to communicate with. Once you retire, that structure and network go away, and you'll need something to fill the gap to assure your days remain rewarding and you remain connected to others.
Consider filling those hours by volunteering for a charity that you've long supported or admired. Alternatively, if you want -- or need -- to keep working for pay, retirement is a great time to find work that's personally rewarding even if it's not quite as financially attractive. Either way, it'll help you fill your days with structure and a network as well as a sense of purpose.
Let your retirement start your next great adventure
By following these five steps, you can improve your chances of having a wonderful time in retirement. Get great plans in place for your money, your time, and your health as the foundation of your golden years, and you can look forward to a successful next chapter in your life.