Are you thinking about retiring? Before you decide you're ready to give up your career and embark upon a life of leisure, it's important to make certain you're really prepared for what retirement entails.
Answering these five questions can help you do that.
1. Where will you live?
Where you live as a retiree can have a profound impact on your financial situation, because the cost of living and tax rules vary a lot across the United States. In some places, for example, you'll face the possibility of local taxes on your Social Security and pension benefits, while in others, these sources of income are tax-free. And in some locations, you'll have to spend your nest egg much more quickly to cover the basics.
You'll need to consider not just geographic location but also whether you plan to stay in your current residence. This decision, too, can affect your finances. If you have a large home, you'll need to make sure you can cover not only property taxes, utilities, and remaining mortgage payments on a fixed income but also help you might need to maintain the property as you age. On the other hand, selling your home and moving to a cheaper one could help to pad your retirement nest egg.
2. What will you do with your days?
Retirement should be a happy time, but for many people, work provides a social life and structure to their days that's sorely missed. The last thing you want is to leave your job and then end up bored and depressed because there's nothing to do.
While you don't need to completely fill out your day planner, you should have a rough idea of what you plan to spend your retirement years doing. This will not only help you make sure you're mentally prepared for a major lifestyle shift but also make it easier to determine how much money you're going to need to fulfill your retirement dreams. After all, if you're going to spend your days gardening, you'll have very different spending needs than if your goal is to travel the world.
3. Will you claim Social Security benefits now or wait?
The amount of your Social Security benefit is affected by the age at which you claim it. While there's no requirement that you start getting Social Security checks as soon as you leave the workforce, many retirees can't survive financially without them.
If you're thinking about leaving work and will need to claim your benefits to do so, be sure you understand the impact your choice will have on the size of your checks. When you find you'll shrink your benefits by 25% if you retire at 62 compared with your full retirement age, you might just decide that working a little longer is better than taking this big hit to your retirement income.
4. Where will your income come from?
Social Security can't be your only source of income as a retiree unless you want to spend your golden years living barely above the poverty level. You need to consider where the rest of your money will come from.
For most people, employer-provided pensions aren't available, so savings is the only other source of retirement funds. If that's the case for you, take a close look at your retirement investment accounts and determine how much income they'll produce for you at a safe withdrawal rate. Then sign into your Social Security account to see what your benefits will be.
By adding up the amount of income your investments and benefits will produce, you'll get a good idea of the funds available if you retire now.
5. What will it take to maintain your standard of living?
Finally, consider what you'll need to spend to live the lifestyle you want as a retiree.
Most people need to replace around 80% to 90% of their preretirement salary to maintain their standard of living, but you might find you'll need a lot more if you're going to spend your golden years indulging in expensive hobbies. It can be helpful to actually make a sample budget if you're nearing retirement so you can get a more realistic idea of your likely spending.
Once you know how much cash you'll need, compare that to your projected income from all sources. If you find you have plenty of cash, a plan for your days, and a good idea of where you'll live, you're probably ready to retire. But if you discover you don't have enough money or any clear idea of what you'll do during your later years, you should do a little more planning before handing in your notice.