If you've worked for many years and are reaching the age when many of your peers are gearing up to retire, then you may be thinking about that milestone as well. But retiring requires careful planning, and if you rush in too quickly, you could wind up very unhappy once your career comes to a close. Here are a few important points about retirement you need to know.
1. Social Security won't cover your expenses in full
Many seniors assume that once they start collecting Social Security, those benefits will suffice in covering the bulk of their bills. But unless you're planning to live an extremely frugal lifestyle, that may be far from the case.
If you're an average earner, your Social Security benefits will replace roughly 40% of your wages. But can you really survive a 60% pay cut? Probably not. Most seniors, in fact, need more like 70% to 80% of their previous wages to enjoy a decent standard of living, so if you're hoping for the same, you'll need savings outside of those benefits.
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2. You'll face many out-of-pocket costs under Medicare
A lot of people assume that once they're eligible to enroll in Medicare, their out-of-pocket healthcare expenses will be minimal. Not so. In addition to premiums for Medicare Parts B and D, or premiums for a Medicare Advantage plan if you choose it as an alternative to original Medicare, you'll need to grapple with copays, coinsurance, and services Medicare won't even cover in the first place, like dental care. If you opt for original Medicare, you may also need to pay for supplemental insurance, or Medigap. As such, be sure to budget heartily for healthcare so you don't run into financial issues.
3. Your savings may run out if you withdraw from them too aggressively
Ideally, you'll kick off retirement with a healthy sum of money in your 401(k) or IRA (especially since, as just mentioned, you'll need income outside of Social Security to live comfortably). But if you're not careful about taking withdrawals from that plan, you could end up depleting your savings prematurely.
Many financial experts advise following the 4% rule when it comes to withdrawals, which means you'd remove 4% of your savings balance your first year of retirement and then adjust subsequent withdrawals for inflation after that. Doing so should, in theory, help your savings last 30 years (though that's certainly not guaranteed). While a 4% withdrawal rate might work for you if you retire in your mid-60s and have a healthy mix of stocks and bonds in your retirement portfolio, if you're retiring at a younger age and are maintaining a more conservative investment mix, you may need to start with a smaller withdrawal rate -- say, 2% or 2.5%. If you withdraw from your savings too aggressively, they may not be there for you when you need them.
Plan now, enjoy later
Many seniors go into retirement blindly and end up struggling financially because of it. Before you pull the trigger on retirement, think about what your expenses will look like and make sure the income you anticipate is enough to cover them. You may need to delay retirement a bit to save more money or give yourself the option to grow your Social Security benefits to avoid cash flow problems as a senior, so definitely run those numbers before calling it quits on the work front.
