It’s coming up on the time you may be ready to retire. Are you sure that you are ready? Ask yourself these five questions first.
1. Where Are You Planning on Living?
Where you are thinking about retiring will have a major impact on your financial situation and your ability to retire well. This is because the cost of living and the tax laws can vary greatly from state to state. For example, in some states you might be facing the possibility of state and local taxes on your Social Security and/or pension benefits. These sources of income are tax-free in other states. In some states, your retirement savings could last for years and years. In others, you may blow through your nest egg much more quickly just to cover your most basic living expenses. You also need to think about staying in your current home (if you own one) or selling it and “downsizing” into something smaller and cheaper, and enjoying the difference in profit.
2. What Do You Plan on Doing With Yourself?
While you may think you are ready to retire, for many people, their work has been the source of their social life and a regular routine day in and day out for decades. If you suddenly find yourself with nothing productive to do with your days, retirement can quickly sour. Plan for something to do with your time. This could be volunteering, taking a part-time job, taking some classes, or taking up a new hobby. Whatever it is, have a rough idea of what you plan to spend your retirement years doing.
3. When Will You Claim Social Security Benefits?
The earlier you decide to take your Social Security Benefits, the less you will receive. If you retire at 62, compared with your full retirement age, your benefits could be 25% less than if you kept working to full retirement age. Once you retire, there is no law that says that you must take your benefits. Even if you have retired early, if you can live without your benefits, it will pay you to wait till you reach the age of your maximum benefit.
4. What Will Be All of Your Sources of Income?
The time when most of us could retire with Social Security as our only income has long since passed. What other sources of income will you have during retirement? For most people, employer-provided pensions aren’t available, so savings is the only other source of retirement funds. If that’s the case for you, take a close look at your retirement investment accounts and determine how much income they’ll produce for you at a safe withdrawal rate. Then sign into your Social Security account to see what your benefits will be. By adding up the amount of income your investments and benefits will produce, you’ll get a good idea of the funds available if you retire now.
5. How Much Will You Have to Spend to Live the Way You Desire?
Finally, consider how much money you’ll need to live the lifestyle you want as a retiree. Most people need to replace around 80% to 90% of their preretirement salary to maintain their standard of living, but you might find you’ll need a lot more if you’re going to spend your golden years indulging in expensive hobbies. It can be helpful to actually make a sample budget if you think you are ready to retire so you can get a more realistic idea of your likely spending.