Important Things You Should Think About as You Prepare for Retirement
What does your dream retirement look like? If you’ve spent years working and saving in preparation for this new chapter in your life, you probably have an idea of what you would like to do next. Do you picture your days filled with activities like volunteering or exploring new hobbies? Do you want to pursue a second-act career in a field that you are passionate about? Or maybe you have been looking forward to the day you can buy a retirement home in a warmer climate. This period in your life can be an exciting new start, but it is important to remember that whether you want to slow down and enjoy a more relaxed pace or jump into an active lifestyle with new adventures, the retirement that you are looking forward to will come with expenses. When you are no longer working, you will have to rely on the financial preparations you have already made to support you, and there will be many factors to include as you make decisions about your retirement.
No matter what you are looking forward to in your next chapter, here are nine things to consider as you prepare for your retirement.
1. How much money will you need?
Visualizing the type of lifestyle you want in retirement can help you to estimate what your annual expenses might be, but ultimately you must determine what your budget will allow. You need to think about the costs you will have for housing, food, healthcare, transportation (car maintenance, gas, insurance, repairs) and taxes. You will also need to ensure that you have enough money saved in an emergency account. Having three to six months’ worth of expenses in a savings account is just as important during retirement as it is during your working years.
2. When do you plan to retire?
There are several things you need to think about when deciding at what age you should retire:
- Social Security. You can start receiving your Social Security retirement benefits as early as age 62, but you are entitled to full benefits only when you reach your full retirement age, which is between 66 and 67, depending on the year you were born.
- If you have a pension, you should also factor in when this may go into effect.
- Another consideration is longevity. Depending on the age you retire and how long you live, your savings may need to last for ten, twenty, or even thirty-plus years. The difference of even a few years can have a significant impact on your finances.
3. What income sources will you have?
Retirement income can come from a variety of sources. This may include:
- Part-time work
- Retirement savings accounts such as a 401(k) or Roth IRA
- Pension
- Social Security
- Stock-based compensation from an employer
- Employer-sponsored retirement account
- Residual income from investments such as real estate
- Taxable accounts
- Interest in a business
Your financial advisor can help you to review your sources of income and make a financial plan that maximizes your resources during your retirement.
4. How are you preparing to cover your healthcare costs?
Most Americans who are 65 and older have Medicare for their health insurance, but it will not cover all of your healthcare expenses. During your retirement, you may experience changes in your health that require medical intervention, and you need to think about how you will pay for the potential costs of:
- Hospitalization
- Palliative care
- Hospice care
- In-home care, nursing home care, or assisted living facilities
- Prescription drugs and therapies
- Out-of-pocket expenses
It can be helpful to look into a Medigap plan to offset costs that are not covered by Medicare. There are also Medicare Advantage plans, private insurance plans, Medicaid, and long-term care insurance policies that each have their own rules and limits regarding coverage. As you prepare for your retirement, you will want to include these expenses in your budget.
5. What is your investment and distribution strategy?
Once you retire, you will start drawing from your investment portfolio, so having a clear plan is important. Do you have sufficient assets and are they positioned correctly to meet your financial goals? How much should be distributed from your retirement plans versus your individual and joint accounts? Are the right assets held within the correct amounts to meet your needs? You will need to think about your income, savings, expenses, and tax bracket as you work with your financial advisor to optimize your portfolio, your investments, and your distribution strategy.
6. Where will you live?
This is one of the most personal decisions you will make as you plan your retirement. Everything from your budget, to proximity to family and friends, to your preferred climate needs to be factored in. Here are several considerations:
- Have you lived in your house for many years and are comfortable there? If you are thinking about downsizing, less square footage may cost less in overall maintenance, but the prices of homes have increased nationally and interest rates on mortgages are up. If you want to purchase something newer, even the price of a smaller home might be close to that of your current home. If you are happy where you are, you may want to look into upgrades that will improve the energy efficiency of your home and can save you money over time.
- If you have any mobility issues, will your home continue to accommodate your needs now and in the future? Can you age in place with a few renovations? Or should you consider relocating to a house or condo that offers one-level living?
- Are you near your friends and family? Is your current home in the climate you want to live in? Or would you prefer to explore a change of scenery?
- Do you envision living in a planned retirement community? This environment can offer an active senior lifestyle, but you will have to budget for homeowners’ association fees that can be expensive.
- Moving costs can add up. According to a recent study, the average American spends $17,000 on the relocation process.
Whether you plan to stay in your current home or move, you need to consider mortgage costs, moving expenses, property taxes, insurance, utilities, home maintenance and inflation as you prepare your retirement budget.
7. Do you have an estate plan?
If you do not already have an estate plan, it is not too late to create one. And if you do have one, as you prepare for retirement, it is a good idea to review your documents and make sure that they are up to date. Your estate planning documents may include a last will and testament, trusts, a financial power of attorney, a healthcare proxy, a living will, beneficiary designations, and a last letter of instruction. This specific set of legal documents lets you dictate how your medical care will be handled if you become incapable of making decisions for yourself, how your loved ones will be taken care of in the event of your passing, and how your assets will be transferred. Your financial advisor can review any documents you may have in your estate plan and help you to make any necessary updates to ensure that your wishes are reflected.
8. What is your tax strategy?
Do you understand how your retirement income will be taxed? Everything from the state you live in to the sources of your retirement income will factor into the taxes you will pay. Your financial advisor can work with you to create a tax-efficient retirement plan that is customized to your unique circumstances.
9. What will you do with your time?
A sense of purpose and social connection is vital for mental well-being during retirement. After many years of working and following daily routines, switching gears to a lifestyle that allows you to enjoy tremendous flexibility in your schedule might be a challenging adjustment. It can be helpful to create structure in your schedule and put some events on your calendar to look forward to. Whether you want to travel, try new hobbies, get involved with volunteering, or spend more time with friends and family, thinking about how you want to live your retirement days can help you to plan for a lifestyle that provides you with satisfaction while staying within your budget.
Retirement can be a wonderful and fulfilling time, but it is important that you take every step you can to financially prepare for it. It can be helpful to speak with your financial advisor so they can assist you in evaluating your projected retirement expenses and make any adjustments to your financial plan that might be necessary to keep you on track to meet your goals. Please contact us if you would like more information.
