Retiring is something many people look forward to throughout their lifetime. But before you retire, you need to get your financial ducks in a row so you don't end up broke in your 80s.
In particular, there are some key steps to take to protect your future financial security and ensure that handing in your notice and leaving work for good is right for you.
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1. Make a detailed budget to ensure you have the income you need
First and foremost, you'll need to make sure you have enough money to cover all your essential costs. You can do this by:
- Making a budget: Estimate what your expenses will be in your retirement. Don't forget to take into account things like Medicare copays and coinsurance costs, taxes, and things you may want to do as a senior like traveling.
- Estimating your income: Check your MySocialSecurity account to get an estimate of what your Social Security benefit will be depending on your age when you claim benefits. And figure out how much income your retirement accounts will produce by looking at your balances and assuming you'll withdraw 4% (or less) of your account balance during your first year of retirement and then adjust up each year to account for inflation.
Once you know how much you'll have to spend versus how much you'll be bringing in, you can make certain you are actually ready to support yourself without a paycheck. If you discover your income won't stretch far enough, you'll have to decide between putting off retiring until you have more in savings or looking for ways to cut costs such as moving to a cheaper area.
2. Get the right insurance coverage in place
As a retiree, you need to minimize the risk of large financial losses since you'll most likely be on a fixed income. To do that, you should have the right insurance coverage in place.
Obviously, you're going to need medical insurance coverage -- which could come from Medicare if you're 65 or older. But Medicare doesn't always cover as much as you think, so you may need a Medicare Advantage or Medigap policy to avoid big copays and coinsurance costs.
You'll also want to make sure you have enough other types of insurance coverage to protect against liability claims against you and to prevent loss of your valuable assets.
For example, if you're staying in your house after retirement, you'll need to think carefully about how much homeowners insurance you'll need. You might want to adjust your policy limits upward if your property's replacement cost has increased or reduce your deductible if you'd have difficulty paying a large amount out of pocket if you have to make a covered claim.
Likewise, car insurance can become more expensive as you get older as seniors are considered a higher-risk group to insure -- but you don't want to skimp on coverage even as premiums are rising. Consider how much car insurance you need, make sure you have the right protections in place, and confirm that you can afford your premiums on your budget.
3. Confirm you have the right asset allocation
Finally, as a retiree, you'll most likely start drawing from your investment accounts to support yourself -- so it's critical to make sure you have the right asset allocation. You don't want too much money invested as this would mean taking on too much risk. But you don't want to invest too little and find yourself not earning the returns necessary to maintain a healthy portfolio balance.
A good rule of thumb is to subtract your age from 110 and invest that much in the market. You'll also want to consider having a few years of living expenses in cash in a bank account, in case you need to withdraw money during a market downturn.
By taking care of these three tasks before retiring, you can ensure you're in a good place to leave the working world while still maintaining a stable financial life throughout your later years.
