Retirement is a milestone many people eagerly await. And if you're getting closer to it, you may be growing increasingly excited by the day. But before you make your retirement official, be sure to answer these essential questions.
1. How much annual income can I get out of my savings?
Looking at your savings balance before retiring isn't enough. You might see that your IRA or 401(k) plan has $1 million in it. But unless you figure out what that means in terms of annual income, it won't do you that much good.
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Instead, figure out how much you can safely withdraw from your savings each year to avoid depleting your nest egg prematurely. A good rule of thumb may be to withdraw 3% of your balance per year for a retirement of average length. But if you're anticipating a longer retirement, 2% or 2.5% may be a better bet.
On the end hand, if you're looking at a shorter retirement, you may be able to get away with a larger annual withdrawal rate -- the logic being that your money won't need to last as long. But remember, your health might end up surprising you in a good way. So unless you're retiring on the later side, don't assume your retirement will be all that short.
2. What kind of home will I own or live in?
Even though your healthcare costs might climb in retirement, housing might still end up being your biggest monthly expense. So it's important to make some choices ahead of time so you know what costs to anticipate.
To that end, ask yourself what type of home you see yourself living in. And it doesn't have to be a place you own, either. You may decide you want to rent a beachside condo, or an apartment in a city offering plenty of nightlife. That way, you'll only be liable for a monthly rent payment, which may be an easier thing to work into your budget.
On the other hand, if you do plan to become or remain a homeowner in retirement, you'll need to think about what that expense will amount to. Retaining a larger home is apt to cost more than downsizing to a smaller one. And owning a home on lots of land will mean more work -- and maintenance costs -- than owning a home with less land.
One thing to keep in mind is that housing might cost you a lot of money even if you're mortgage-free by the time your retirement begins. Factor in expenses like upkeep, repairs, HOA fees, and property taxes to know what costs you'll likely be dealing with.
3. How will I keep busy?
The last thing you want is to close out your career only to end up bored. Retirement can be a great time to explore different hobbies -- ones you didn't have time for earlier in life -- but you'll need to make sure you can afford to do the things you want.
Taking college courses is something that might interest you, for example. But if the cost of paying for them is beyond your budget, you may need to come up with a different plan.
The good news, though, is that some of your retirement hobbies might be able to double as income streams for you. That could give you more spending flexibility.
The more planning you do for retirement, the more you might end up enjoying that stage of life. So be sure to run through these questions ahead of time. Figuring out what your annual income, housing expenses, and entertainment costs look like can help you enter retirement with more confidence -- or, if necessary, make changes that help you avoid disappointment and a financial crunch.
