Many, if not most, of us can't wait to retire. We may be counting the years and dreaming of things we'll finally get around to doing. We may be checking out boats or recreational vehicles in magazines. But too many people are approaching retirement without having a good sense of whether they're really ready to retire.
Below are a big bunch of issues to consider that can help you tell if you're ready to retire.
Are you ready to retire -- with a plan?
First off, do you have a plan? It's reckless to approach retirement without one. You need to have a good handle on how much income you'll need in retirement and exactly how you will get it.
You need other plans, too, such as a will, a living will, a durable power of attorney, and a healthcare power of attorney. Many people would be well served with an estate plan, arranging for how their assets will be managed and eventually transferred to others upon their death.
Having a healthcare plan is also smart. What kind of healthcare insurance will you carry in retirement, and how much will it cost you? Know that per Fidelity Investments, a 65-year-old couple retiring today will spend, on average, a total of $245,000 out of pocket on healthcare. (That's an average, of course -- meaning you might spend less, or more.) You'll need to factor significant healthcare costs into your overall plan.
Finally, if you're part of a couple, be sure that the two of you share the same plan. Develop a joint vision of how your retirement will play out and know what each of you wants. (Where will you live? What activities will you engage in?) Have a joint understanding of your finances, too. You may think you have enough to live off of comfortably in retirement, but if you end up surprised that your spouse wants to travel extensively around the world, your plan may have some holes in it.
Are you ready for life's curveballs?
Despite all the plans you may have, and the preparations you've made, you should be ready for curveballs, too. After all, life rarely unfolds just as we expect it to. So while you might be planning to retire at age 65 or 67, you might unexpectedly lose your job at age 62. While you might be planning to live in your current home for the rest of your life, in part because it's near your kids, those kids might up and move across the country, and you might need or want to follow. You might be planning to work until you're 70, but health setbacks might force you to leave the workforce years before that.
You can't know exactly which curveballs will be thrown at you, but you can -- and should -- stay nimble and flexible. Keep several Plan Bs in mind and perhaps prepare for some worst-case scenarios, just in case. Have an emergency fund, too, to handle unexpected financial demands.
Are you financially ready to retire?
Let's get back to finances now, because a decent retirement is all but impossible if you don't have the funds for it. First off, think about your debt situation. If you're saddled with credit card debt, you are probably not ready to retire. Many people even like to pay off their mortgage before retiring, to minimize their expenses in retirement.
How on track are your savings? How big does your nest egg need to be and will it reach that size on schedule? How much of it will you withdraw each year? A general rule of thumb is that withdrawing 4% of it in your first year of retirement and then adjusting the annual withdrawal for inflation after that is very likely to make your money last about 30 years, if it's split between stocks and bonds. But that rule isn't a guarantee and its usefulness depends on a variety of factors, such as market performance.
Figure out how much income you can count on from which source. The average Social Security retirement benefit was recently $1,344 per month, or about $16,000 per year, while the maximum benefit for those retiring at their full retirement age was recently $2,639 per month -- or about $32,000 for the whole year.
Do you have a pension? If so, great. If not, you might look into buying an immediate annuity (as opposed to a variable or indexed annuity), to provide relatively guaranteed income. Dividend-paying stocks can be another great source of income. A portfolio with $200,000 in them and an average yield of 3.5% will generate $7,000 per year, with that sum likely rising over time as the underlying companies increase their payouts.
If you find that you're behind in your savings and your nest egg isn't where it should be, all is not lost. You can improve your situation in various ways, such as by working longer, taking on an extra job for a while, cutting back spending, and so on.
Are you emotionally ready to retire?
You need to be ready for retirement emotionally, too. Many people look forward to it only to find themselves bored, restless, or lonely. The routine of working is more important to some of us than we realize. Brace yourself for that and consider how you might deal with it -- maybe by getting a part-time job or taking up new hobbies.
Finally, don't think you have to do all this preparation on your own. It can make plenty of sense to consult a financial advisor to help you get all your ducks in a row. Ones designated as fee-only won't be looking to earn commissions from selling you products.
Go ahead and look forward to retirement, but be prepared for it, too.