Aside from the question of whether your spouse is ready for you to be around all day, making the decision to retire requires an enormous amount of preparation. How do you know if you're ready?
First: Know Your Expenses
Knowing what you spend money on and how much you actually need is critical for retirement planning. If you haven't already, take the time to do an expense analysis. You can use this easy Expense Analysis Worksheet that I created for my clients. Alternatively, you can search the Internet for online tools or software such as Mint or Quicken. By understanding where your money is going, you'll be able to assess how much you need to live comfortably and where you have opportunities to save.
Plan for changes in your retirement expenses
Remember that in retirement you'll have a lot more time, so your expenses might look a bit different. Maybe you'll want to spend more money on traveling or eating out, or maybe you'll decide that you don't really need that second car—these changes should be planned for and included in your budget.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Consider downsizing
You might find that there are a lot of things you don't really want or need in retirement. I talk to many people who consider downsizing for the transition, usually to a smaller condo or townhouse.
The thought of downsizing can be a bit painful, especially if your five-bedroom house is full of memories, but consider asking yourself if you really still need all that space once the kids move out. In addition to the potential financial benefits (especially if you have significant equity in your home), there's also the day-to-day matter of upkeep and convenience.
A smaller condo could give you the freedom to travel more, or at least remove the headache of cleaning all those bedrooms, maintaining the lawn, paying taxes for schools you no longer use, and the list goes on.
Account for healthcare cost changes
Unexpected healthcare expenses can torpedo even a well-thought out retirement savings plan, so don't let them take you by surprise.
It's important that you understand how much you'll be spending on health insurance and what you'll get in return once you leave the workplace. And don't forget that you may want to factor in any other potential insurance plans. Will you be taking on a new long-term care policy or dropping your disability coverage? The cost of these decisions will vary depending on your age and health, so take the time to get a real understanding of the different options.
Also, try to build some breathing room into your retirement budget for any unplanned medical expenses, or any additional unexpected costs for that matter. If you don't use those funds, great—you can save them for later. If you do, though, you'll be glad you were prepared.
(Want to know more about healthcare savings? Take a look at my article on HSAs.)
Next: Understand Your Income Sources
Where will your income come from in retirement? Are you counting on a combination of Social Security, annuities, pensions and distributions from your retirement savings? Or do you have savings you can convert into an investment account or income stream? Do you plan to work part-time for a while? Think about all the different sources of income you might be receiving and what you can expect from each.
Remember that if you retire before age 59½, and you want to draw down from your retirement savings, you'll most likely encounter a 10% penalty, unless you meet one of the exceptions.
Finally, don't forget to factor in any income tax payments, including taxes due on distributions from your retirement accounts. Don't let this take you by surprise!
Generate additional income
Once you've isolated how much money you'll need to live on and where it's going to come from, you need to figure out whether you'll have to use a portion of your investment accounts to help meet your needs. Perhaps you have sufficient income from Social Security, a pension, or any annuities, but if it isn't enough, you might need to turn to your retirement accounts or other non-qualified savings or investments.
If you do, you might be asking if you should set up the account as an income-generating portfolio that provides dividend or interest income, a growth portfolio that appreciates and provides capital gains, or a combination of both.
Prepare to take on some risk
It's currently very difficult to get significant income from a very low-risk portfolio. In order to generate enough, you might have to take more risk than you initially expected—meaning that you might want to keep growth-oriented investments in your account. Every situation is unique, but you may want to consider a portfolio that combines growth, dividend and income-producing investments, which balance risk-taking with your specific income needs.
Keeping risk in your portfolio means that it's also critical to think about what will happen if the market declines. You might have to dip into your principal account balance in these situations, which can be scary if you never expected to do so. Can your portfolio survive this situation? Will it make it harder for you to stay comfortable in retirement?
Unfortunately, we just don't know how the market will perform in a given year, and the stakes are a lot higher in retirement than when you're 30 with a steady job. When you invest to achieve higher returns, you also have to be cognizant of possible negative returns and be sure to plan accordingly.
Don't forget about inflation
Finally, don't forget about inflation, both in your income and expenses. The cost of goods and services that you need will likely be much higher in years to come. While overall inflation has been very low for the past few years, it still adds up when you're thinking in terms of decades. Add to this the uncertainty of healthcare costs in the future, and you'll want to be sure to put in some padding.
What would happen to your savings if you had to increase your withdrawals a little bit over time? What if inflation rises but your portfolio doesn't match the pace? While stocks tend to outperform over the long run, you don't want to have to look at market returns every day to get peace of mind about your decision to retire.
Take the time to investigate all of these questions, whether on your own or with an adviser, so that you're truly prepared for retirement. Preparing appropriately is half the battle: After all, the point of retirement is to relax and enjoy a stress-free life. After working all those years, raising kids and sacrificing all those years, you deserve it!
Bradford Pine is a wealth adviser and president of the Garden City, NY-based Bradford Pine Wealth Group. He assists individuals to create wealth, simplify their lives and plan for retirement. He wrote this column with Anna B. Wroblewska.
-
COVID Aged Your Brain Faster, Even if You Didn't Get SickWhether you contracted COVID or not, your brain took a hit. Here's what that means for your health and what you can do about it.
-
This Might Be What Your Retirement Portfolio Is MissingYou can supplement your retirement nest egg or save for other goals with a taxable brokerage account.
-
Five Things to Do if You're Forced Into Early Retirement (and How to Reset and Recover)Developing a solid retirement plan — before a layoff — can help you to adapt to unexpected changes in your timeline. Once the initial panic eases, you can confidently reimagine what's next.
-
I'm an Estate Planning Attorney: These Are the Two Legal Documents Everyone Should HaveEvery adult should have a health care proxy and power of attorney — they save loved ones time, money and stress if a sudden illness or injury leaves you incapacitated.
-
Six Big Beautiful Opportunities: Advisers' Guide to Tax and Client StrategiesHere are several ways financial professionals can help their clients maximize opportunities in the One Big Beautiful Bill Act, which extends key TCJA provisions, introduces increased deductions for people 65 and older and more.
-
Avoid Medicare's 'Shadow Tax' With This Financial Expert's IRMAA-Busting TipsYou're cruising along in retirement, and then bam: Your Medicare premiums soar because your income crossed the limit. Take a breath. There could be a solution.
-
Grilling Season and ETFs: There's More Than One Way to Cook Up a PortfolioExchange-traded funds come in a multitude of 'flavors' these days, from passive to active to factor-based. Their flexibility is what makes them so delicious.
-
You Don't Want It, But You Should Plan for It Anyway: An Expert Guide to Long-Term CarePlanning for long-term care is crucial to protect your independence, family and financial stability against unexpected health events and rising care costs not covered by standard insurance.
-
You Don't Want Just a Financial Plan: You Need a Purpose and Retirement IdealsThese five questions will help you drill down to what you really want out of retirement. Then you can get down to the business of crafting a financial plan to make it happen.
-
How to Buy an Annuity Online (Without Regret)You should never be rushed into buying an annuity. But now that they can be sold quickly and easily online, you need to be more alert than ever to pushy salesmanship. Here are four signs you're working online with a professional.
