It's always a good idea to plan for retirement rather than wing it. And in the course of your planning, you might aim to land on a retirement date and an ideal setting for your senior years, whether it's a bustling city or a quiet home in the country.
But in addition to those things, there are certain financial factors you'll need to account for. Here are three you can't afford to gloss over.
1. The amount of your future Social Security benefit
Social Security doesn't pay a single universal benefit. Rather, the benefit you'll be in line to receive in retirement will hinge on two factors:
- Your lifetime earnings
- The age at which you claim benefits
You can get a basic sense of what Social Security will pay you each month in retirement by creating an account on the Social Security Administration's website and accessing your annual earnings statement, which should contain an estimate of your future benefit. Keep in mind that the further away you are from retirement, the less accurate that estimate might be.
Furthermore, if you think you'll end up retiring early, you should expect a lower benefit from Social Security than the benefit you'll get upon reaching full retirement age (assuming, of course, that you retire early and claim benefits right away). On the flip side, if you think you'll work throughout your 60s and delay your Social Security filing until age 70, you might snag a much higher monthly benefit.
The key, either way, is to get a sense of what to expect. While the amount of money you're able to withdraw from your savings each month might vary based on market conditions, Social Security will pay you the same benefit for life (not accounting for annual cost-of-living adjustments). So it's important to know what payment you're in for.
2. The amount of annual income your savings will give you
You may be inching toward retirement with a decent pile of cash in your IRA or 401(k) plan. But what will that actually amount to on an annual basis? To figure that out, you'll need to first come up with an annual withdrawal rate and then crunch some numbers.
For years, financial experts have advised savers to stick to a 4% annual withdrawal rate. You may want to go higher or lower depending on your personal situation. But if we use 4% as a starting point and you have a $1 million nest egg, that leaves you with $40,000 in annual income. Knowing that, plus the amount of your Social Security benefit, could inform certain retirement decisions you make, like the type of home you choose to own or the city you decide to call home.
3. The amount you'll spend on healthcare
Healthcare tends to be a substantial expense for retirees, and it's tough to estimate its cost in advance. That's because there are many different factors that go into that equation, like your personal health and the Medicare plan you choose.
That said, you can still research different Medicare costs to get a sense of what you might be in for. That could, in turn, help you put together a more accurate retirement budget. Keep in mind that Medicare costs can climb from year to year, so if retirement is still, say, a decade away, you may need to pad today's numbers substantially for the purpose of creating your own estimates.
Retirement can be a rewarding period of life, but also a financially precarious one. In the course of your planning, make sure to take these factors into account so they can guide you toward sound decisions.