The U.S. Census Bureau states that the average American retires at age 63. Yet the Social Security Administration defines full retirement age as between 65 and 67, depending on your year of birth. Your employer may say something different. Deciding when to retire is one of the hardest decisions you’ll have to make. Retire too late and you may not have the energy to enjoy it. But if you retire too early, you could end up in financial trouble. So how can you know if you’re truly ready to retire?
When you’re mulling over your retirement readiness there’s more to consider than your current retirement savings. We made this checklist to help near-retirees determine if they’re really ready. Ideally, you’d cross off each item on this retirement checklist before leaving your job.
1. Take inventory of your assets.
First things first: You need to figure out where you stand financially. Evaluate your budget. Write down every debt, liability, savings balance, income stream and insurance policy you have. Don’t forget about properties, vehicles and other valuable possessions that affect your bottom line. A good way to do this is by creating a worksheet that you can adjust on a regular basis. This process will allow you to assess your current financial situation and plan accordingly.
As you review, keep in mind that you won’t be getting a paycheck once you retire. Experts often say you’ll need at least $1 million to retire comfortably, but Bureau of Labor Statistics records show that the average American age 55 or older spends $49,279 every year. Whichever benchmark you use, it will at least give you something to measure your current status against.
2. Build an emergency fund.
Before you take any major financial step, you want to be sure you’re protected should things not go according to plan. Hopefully you aren’t learning about emergency funds for the first time when you’re within years of retirement. But if you have somehow gotten this far without a financial security blanket, now’s the time to create one. It will cover you in the event of personal catastrophe, and it can also make up for delays in the start date of your pension or Social Security.
Some experts recommend that you sock away three months of living expenses, while others suggest you save enough for at least a year. Six months’ worth of funds should be enough to cover you in case of emergency. Base the amount of this six-month fund on your expenses, not your income. No matter your current state of employment, this fund is about how much you’re spending. Remember to include expenses currently covered by your employer (like healthcare) because your emergency fund will need to transition into retirement with you.
Keep your fund somewhere safe and separate from your other savings so you aren’t tempted to spend it. A passbook savings or money market account could be a good option. They’re liquid in case you need to access your funds, but still earn interest.
3. Eliminate all debt.
In an ideal world, we’d all enter retirement without any debt. Since your income is likely to decrease, any fixed payments will start to take up a larger share of your expenses. If you’re nearing retirement, it’s time to take a look at the debt column of your inventory. Add interest rates and terms in a new column beside your outstanding debts.
So, how should you tackle your debts? There are generally two thoughts on where to start: either by paying down debts with the smallest balance or debts with the highest interest rates. If you can stomach it, we suggest starting with highest-interest-rate debts. This is usually credit card debt, followed by personal loans and car loans. And we don’t just mean hitting the monthly minimum. To really make a dent, you’ll have to put as much money as you can to paying down your priority debt without sacrificing making the minimum payments on other debts. Mortgages are a good debt to save for last as these tend to have low interest rates.
No matter what repayment strategy you choose, the most important thing is sticking with it. Map it on a calendar, track your progress and ask a friend or family member to keep you accountable. Any time you successfully pay off a debt, give yourself a small reward to stay motivated.
4. Determine your retirement needs.
Before you can retire, you have to decide how you want to retire. Consider where you want to live, whether you’ll have a job (this may sound crazy, but some people like to work in retirement) and what your expenses will be. Try to be realistic in terms of retirement length, too. This can be difficult to predict, but you can always refine your estimate down the line.
You should also create a timeline to show when different streams of income will begin. This will help you manage cash flow and determine how much you need to save to retire. Look to your Social Security account, employee-sponsored retirement accounts, individual retirement accounts and, for some, wages and a pension. Be sure you’re thinking of each income in post-tax dollars, as many retirees fail to factor in taxes. See how your pre- and post-retirement budgets compare. The more realistic you are, the better prepared you can be. If you need help building or vetting your plan, you can find a financial advisor to help.
5. Square away health insurance.
Healthcare is one of the biggest expenses you’ll face in retirement. According to the Bureau of Labor Statistics’ Consumer Expenditure Survey, healthcare costs account for an average of 11% – 15% of retirement spending, depending on the retiree’s age. Don’t feel bad if this means you have to make a quick adjustment to Step 4.
In addition to factoring these expenses into your budget, you’ll also want to consider where you’ll be getting health insurance coverage. If you retire at or after the age of 65, you can largely rely on Medicare for your retirement needs. You can get an overview of Medicare’s coverage and costs at the official www.medicare.gov site. Pay special attention to anything you need that isn’t covered. Some people like to have a supplemental insurance plan.
Things get trickier – and more expensive – if you plan to retire early. If you don’t receive health insurance from your former employer or through your spouse’s employer and don’t yet qualify for Medicare, you’ll have to get health insurance on your own. Whatever your situation, just make sure your insurance doesn’t lapse when you need it most. Know the terms and conditions of your coverage as well as how much you can expect to pay in premiums, deductibles, co-pays and out-of-pocket costs.
6. Plan your estate.
No one likes to think about their demise, but as you near retirement you’re also realistically getting closer to the end of your life. Being prepared with an estate plan will ensure your family is not plagued with financial burden after you’re gone and that your money is dispersed according to your desires.
In addition to creating a will, you’ll need to assign a power of attorney and healthcare proxy to make decisions on your behalf should you become incapacitated. You’ll also need to establish guardians…