Planning for your retirement can be an exciting endeavor, but also a scary prospect if you feel financially unprepared.
So how do you know if you’re really economically ready to say goodbye to your colleagues and check out of the workforce?
Katie Libbe, Allianz Life’s vice president of consumer insights, has created a last day of work checklist for people who are on the cusp of retiring.
According to Libbe, if you’ve asked – and answered – the following six questions, you’re solidly positioned to face retirement with confidence:
Questions #1: Have I calculated my basic living expenses and sources of income?
Unfortunately, many people have only a vague idea of what their costs will be in retirement. While some people think their expenses will go down considerably (think: no commuting costs or eating out lunch everyday), others expect their costs will actually go up in retirement due to lifestyle changes (perhaps doing more travel or taking up a much-anticipated hobby).
Whatever the case, you’d be wise to know exactly what your monthly budget will look like – and how you plan to cover your basic living expenses, and luxury items too.
Question #2: What will I do with my employer-sponsored retirement plan (i.e, 401(k) 403(b), etc.?
Libbe notes that most Americans have spent a good portion of their working years contributing to their retirement accounts. But the challenge, she says is that “unlike previous generations, this money is not guaranteed in the form of a pension that pays out every month for the rest of your life.”
“YOU are responsible for making that money last and need to determine a strategy to ensure it does just that,” she adds.
One option she recommends: set aside a chunk of your assets to an annuity with some kind of guaranteed income stream that you can’t outlive.
Question #3: When should I claim Social Security?
Even though you’re eligible to claim Social Security benefits starting at age 62, that’s often not in your best long-term financial interest.
In fact, for every year you can delay taking your Social Security benefits, you’ll increase your monthly benefits by about 8%.
That’s why planners often suggest that you try to live off other assets until you reach age 70. At that age, you can start making Social Security withdrawals that will net you the biggest possible monthly payout.
Question #4: Have I addressed inflation and health care costs in retirement?
Inflation has been under 3% annually for the past 20 years. But there’s no telling where it will be in the future. Even if you’re 50 now, and you plan to retire in 20 years, with inflation running at 3%, that means prices can double over the next two decades.
As you age, of course, health care costs start to loom even larger – and those healthcare expenses are greatly impacted by inflation.
Plan ahead now so that health care costs, particularly unexpected bills, don’t wipe out your retirement savings.
Question #5: Can I streamline retirement accounts?
Libbe suggests that, if possible, you should try to consolidate any retirement accounts, such as IRAs, to simplify your recordkeeping and offset the impact of taxes and Required Minimum Withdrawals. “How you take your money out of your retirement accounts can be just as important as how you got the money into the accounts,” she says.
Question #6: Is my family protected?
Before you go full steam into retirement, it’s also a smart step to safeguard your family in the event your retirement is thrown off – by illness, death, financial misfortune or another personal or healthcare-related emergency.
Libbe says one way to gain true piece of mind on your last day of work is to get your documents in order prior to leaving the workplace. For example, prepare a will and/or a living will, and consider drawing up healthcare directives or a power of attorney.
January is an especially popular month for retirement.
And for Baby Boomers especially, if you take the steps necessary to properly answer these six questions, you’ll be well onto your way to ensuring a smooth and successful transition to retirement – whenever it ultimately happens.