5 Questions You Need To Answer Before Retiring

September 3, 2018

You may be mentally and physically ready to retire, but are you financially ready to retire? Don't just automatically assume that your current nest egg is sufficient because you’ve reached a certain age. Assess your financial readiness, starting with these five questions.

1. What Are Your Retirement Goals? – Typical advice suggests aiming for 80% of your pre-retirement income during retirement, but that assumes an average retirement. Maybe you are planning a more active retirement that requires a different income stream.

Do you plan to move to an area with high housing costs? Do you plan to travel extensively? Do you have expensive or simple hobbies? Give serious thought to how your goals will change your expenses in retirement beyond your normal living expenses.

2. Do You Have Enough Retirement Income? – Start with an assumption that you will have 25 years in retirement and can withdraw 4% of your nest egg each year, then adjust that up or down depending on your retirement goals from above. Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

Now that you know how much money you need, where will you get it? Start by figuring your estimated Social Security benefits through the mySSA website. Next, figure in monthly withdrawals from any 401(k), IRA, pension, or other retirement program that you have. Finally, include any other assets you intend to draw on during retirement, such as a reverse mortgage on your home. See how this compares with your anticipated spending.

3. When Should You File For Social Security? – The answer to the previous question probably dictates the answer to this question. You can file as early as age 62, but by doing so you could reduce your monthly benefits by as much as 30% if your full retirement age (FRA) is age 67. Conversely, you can increase your benefits by 8% per year if you delay your retirement past your FRA up until age 70.

Check your Social Security options to see if you can afford to retire at an age other than your FRA – but don't rule out the possibility of scaling back your retirement plans in order to retire a bit early.

4. What are Your Likely Health and Long-Term Care Costs? – Fidelity estimated that a 65-year old couple retiring in 2017 will spend an average of $275,000 on healthcare throughout the remainder of their lives – without taking long-term care into account. Start with this baseline and adjust up or down based on personal factors such as your family history and habits. Are you entering retirement in good health, or do you have any behavioral or family risk factors that make it more likely that you will incur higher healthcare costs?

5. How Will You Invest in Retirement? – People naturally tend toward conservative investments in retirement – and rightfully so. If a market correction occurred, you wouldn't have enough time to recover from the losses in an aggressive growth portfolio. However, if you go too conservative with retirement investments, you may not see enough growth in your investments to keep up with inflation.

Strike a balance between risk and security according to your risk tolerance. If you can't handle the proper risk level, go with a level that keeps you from being a nervous wreck – but dial your retirement plans back accordingly.

Only you can decide your own readiness for retirement. Use these questions as a guideline, and if you still can't decide what to do, consult with a qualified financial professional. Remember, it's usually not easy to un-retire.

If you want to reduce your interest payments and lower your debt before you retire, join MoneyTips and use our free Debt Optimizer tool.

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