You’ve worked hard for decades. You are entitled to Social Security disbursements. You are collecting passive income from dividends and interest. You have even invested in real estate. But are you prepared for retirement? It is a question people ask themselves often, but it’s not an easy one to answer. While retirement is an extremely personal decision, we’re discussing seven signs you may be ready to retire. Let’s get started.
7 Signs You’re Prepared for Retirement
1. You Can Visualize It
You may be “retirement age”, but are you emotionally ready to retire? What are you going to do? Will you work or volunteer part-time? Will you spend all day participating in your favorite hobbies or travel the world? Many seniors “retire” for three to six months only to decide that they were really just taking a sabbatical and return to work.
If you can’t visualize what you will do during retirement, you may not yet be prepared to retire. We strongly recommend talking to a friend who is currently in retirement to ask her how the transition was, what she struggled with and how she coped. You might pick up some tips for how to make the transition as smooth as possible.
2. You’ve Worked Out Your Budget
Budgeting in retirement is fairly simple. You know how much you will get each month from Social Security benefits and when that money will come in. Ideally, you have enough Social Security income coming in to cover your necessary expenses, like property insurance, health insurance, car insurance, property taxes, fuel and food. If all your needs are taken care of, it’s a lot easier to ride out a bear market in the early years of your retirement.
3. Plug Any Leaks
It’s not uncommon for seniors to take out a HELOC or second mortgage on their home to make significant home improvements. Depending on the terms of the loan and alternatives to financing maintenance and repairs, this can be a very smart financial decision. When planning to retire, keep in mind that there’s nothing inherently wrong with having a mortgage in the early years of your retirement.
What you really need to watch out for, though, is high-interest debt. It may look in a bull market like your portfolio can sustain you for the next 30 to 40 years. But we strongly recommend that you pay off all costly debt before you think about taking the leap into retirement. If you are the co-signer of your grandchildren’s credit card, student loan debt or motorcycle loan, let them know you are planning to retire. If you have co-signed for a physical asset, have it re-financed to have your name removed. If you are responsible for someone’s revolving debt, pay it off and have yourself removed from the account.
4. Have a Contingency Plan
According to research recently published by the Transamerica Center for Retirement Studies, only a third of current retirees retired when they had initially planned. Over half of them retired sooner than planned due to health difficulties or unexpected job loss. It’s essential that you have a contingency plan in place.
Maybe you’re planning to retire in three years, but a year from now your employer goes through a restructuring and you lose your job. Will you file for unemployment insurance and work part-time until you can find a job that pays you the same salary or wage as the one you just lost? Can you afford to file for Social Security prematurely? Remember, if you file for Social Security benefits at 62, you essentially forfeit 6.67% of your benefits annually for the first three years and then 5% annually for the next two years.
5. You’re Confident You Can Afford Healthcare
The true cost of healthcare in America comes as a real shock to new retirees. In fact, the Employee Benefit Research Institute published a study in April 2019 revealing that fewer than 33% of Americans have attempted to determine how much healthcare will cost them during retirement. Unfortunately, between premiums, deductibles and co-pays, the average senior couple can expect to spend $285,000 during retirement. If you haven’t accounted for healthcare and long-term care, there’s a very good chance that you can’t really afford to retire.
Remember that you should be planning for the unexpected in retirement. You may not budget for long-term care in the form of an in-home nurse or nursing care facility because your daughter said she would become your home health assistant. But by the time you need her, she may be across the country and unable to provide you with care. Research how much home health aides make in your state, consider how many hours you or your spouse may need assistance and work than into your budget.
How to Prepare for Healthcare
A very good general rule of thumb is to withdraw only 4% from your retirement accounts annually. If you expect to need $18,000 a year for healthcare, you will need to retire with 25 times that earmarked for healthcare, or $450,000. The only exception to this is if you have an HSA or another flexible vehicle of liquid capital dedicated to healthcare. For example, if you have a total of $36,000 in your HSA upon retirement, you would only need $414,000 in investments earmarked for healthcare.
6. You Have the Mental Fortitude to Make Smart Stock Market Decisions
Stock market jitters affect the best of us. If you have a set retirement date in mind and the stock market fluctuates drastically during the few months leading up to the date, we recommend retiring on your targeted date. To do this comfortably, you may want a flexible spending plan to account for any market downturns.
For example, withdraw only 3% of your portfolio rather than 4%. There will be plenty of time to travel or achieve your other retirement goals when the market corrects itself. Maybe you take a part-time job until the market recovers. Whatever your plan is, it’s essential that you don’t withdraw your entire portfolio. Time in the market always beats time out of the market, even during the Great Depression. Moreover, it is terrible from a cash flow perspective to lose out on quarterly dividends if those aren’t automatically reinvested and the tax hit you will take on the short- or long-term gains you earned.
7. Your Loved Ones Are Protected
Before you retire, it is important to ensure that your life insurance needs are still being met. We strongly recommend you talk to a fee-only, licensed financial advisor to review your needs and make sure they are still being covered adequately by your life insurance policy. If you don’t already have a life insurance policy, now is the time to get one in place.
Learn More About Living Comfortably In Retirement Today
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