When Can You Retire?

Dana Anspach

May 19, 2020

Once You Have These 7 Things Outlined

1 – A Retirement Withdrawal Plan

What is your Social Security income going to be, and when will you start taking it? How much will you take out of your savings each year? Does it make sense to make withdrawals from an IRA early in retirement, or wait until age 72, when required minimum distributions begin?

You can begin taking Social Security benefits at age 62, but you’ll receive a reduced amount. Waiting until age 67 will get you a bigger monthly check. The longer you wait, the larger the check will be up until age 70.

What’s the right thing to do? If you live to average age or longer, you will get more out of Social Security by claiming at a later age. What’s average? Women can expect to live 85 years on average, while men are living to age 82. White-collar higher-educated folks have even longer life expectancies, so if that’s you, plan accordingly.

If you don’t have a plan, you aren’t ready to retire. You can run a Social Security claiming analysis using a free online calculator at OpenSocialSecurity.

Social Security may be the base of your plan, but it was never meant to be the only source of income during retirement. Your withdrawal plan should include other sources of cash flow, such as:

  • Part-time work
  • 401(k), 403(b) and IRA withdrawals
  • Pension or annuity Income
  • Savings such as money market accounts or CDs
  • Withdrawals from cashing in stocks, bonds, and mutual funds

Remember, retirement can last for up to 30 years or longer. If you withdraw too much too soon, you could run out of money.

Determine how much you can anticipate from each source, what year it will begin, and how long the funds will last.

2 – Retirement Budget

The Department of Labor suggests that retirees need about 80% of their pre-retirement income to cover their cost of living. But this number varies tremendously from one household to another. You may opt for a simpler retirement lifestyle and need only 50% of your pre-retirement income while the next family wants to plan on having 100% of their previous earnings.

The best way to figure out what you’ll need is to develop a retirement budget, or as I prefer to call it, a spending plan. To come up with a starting outline, list your current expenses.  Then look at what will change. During retirement, your bills are not going to be identical to the ones you have now.

Will your mortgage be paid off by the time you retire? Even with no mortgage, there will still be property taxes to pay, which will increase over time.  

How about health insurance? Does your employer pay for that now? If so, you’ll be paying premiums out of pocket once you are retired.

What about travel or hobbies? Will you be spending more on these items once you have more time available?

After you have an outline of your spending plan, try it on for size. If you find that there is more month than money, you still have time to work and build up savings. Having a plan will help you from withdrawing more than you need.

3 – Healthcare Costs Accounted For

Healthcare is likely going to be one of your more significant expenses during retirement. Medicare won’t cover all of your medical bills. You’ll need to add on a supplemental plan and include this premium, as well as out-of-pocket expenses, in your budget.

Also, many people don’t realize that while Medicare Part A (hospital insurance) is free for most, you pay a premium for Medicare Part B (doctor’s visits and such), and it is automatically deducted from your Social Security check. So, don’t forget to calculate that cost in your budget.

And, if you are a smoker or have chronic health issues, your costs will be higher. Those with chronic health issues are likely to spend their entire deductible each year.

Then there are the issues that come with aging. Most of us will need some form of long-term care, which means we’ll need help with activities of daily living in our later years. But Medicare covers minimal long-term care expenses.

You can rely on family, pay for help to come to your home, or reserve savings to pay for a long-term care facility. Average yearly long-term care costs can range from $40,000 to $90,000 depending on the type of care, facility, and location.

There is the option of long-term care insurance. While the premiums can be expensive, many retirees find that the peace of mind they have in knowing this expense is taken care of makes it worth every penny.  

4 – Debt Paid Down and Major Repairs Covered

Before entering retirement, assess your debt. Do you still have a mortgage, car payment, personal loans, and credit card debt? The last thing you want to do is use the money you have spent years putting away to go towards debt.

If you still have debt, develop a strategy to pay it off before retirement. While some low-cost debt may be ok (such as a mortgage with a rate of less than 5%), in general, less debt means more financial security.  Debt carries a heavy burden during retirement.

You can also consider pre-paying big-ticket expenses, like home repairs. Know you’ll need a new roof soon? Take care of it before retirement to avoid repair costs chipping away at your savings.

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5 – Cash Reserves Set Aside

Do you still need an emergency fund in retirement? Yes, you do. Unexpected expenses happen at all ages. A few years back, we would have never considered the cost of being quarantined in a foreign country, but today, travel can bring about unexpected expenses with little advance notice.

During recessions, you may have an adult child that needs help. If you live on the coast, or in an earthquake or flood prone region, a natural disaster may displace you. You never know what will show up next.

That means in addition to your retirement accounts; you will need to have at least 3 to 6 months’ worth of living expenses in an accessible account such as a savings or money market account.

Cash reserves buy you time to figure out a long-term plan to cover unexpected events. Having cash reserves helps you avoid a forced sale of investments at the wrong time or paying excess taxes on a withdrawal from a retirement account. Cash may not earn much, but it can make up for it by saving you in other ways during emergencies.

6 – Taxes Anticipated

Retirement doesn’t mean the end of taxes. While you no longer have withholdings taken out of your paycheck, you may need to have taxes withheld from withdrawals from 401(k)s and IRAs. You can either withhold taxes at the time of distribution or pay quarterly estimated taxes.  

Most forms of retirement income are taxed—even Social Security. While fifteen percent of the Social Security benefits you receive are tax-free, most or all of the rest may be taxed.

So far, we’ve been talking about federal taxes, but there are state taxes too. Some states are very friendly to retirees and exempt most forms of retirement income from state income taxes. But some states provide only a partial exemption, and others tax almost all retirement benefits. Make sure you know your state’s tax rules for retirement income. Some retirees who want to make their savings last longer, may even consider a move to a tax-friendly state.

7 – A Plan for Your Time

In addition to the financial questions, you’ll want to think about how you are going to spend your time. If you identify with your career, it’s vital to have an idea of what your life will look like after retirement; otherwise you might feel lost.

In his book, Keys to a Successful Retirement: Staying Happy, Active, and Productive in Your Retired Years, retiree Fritz Gilbert, emphasizes the importance of the number one thing you’ll need to be happy in retirement – purpose. If you’re struggling to figure out what retirement might look like, he provides practical tips that will help you sort it out.

If you’ve worked your way through these seven items, it’s likely that for you, retirement is well within reach.

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