It is anticipated that almost 4 million Americans will retire in the next 15 years, forcing many to face the question, “Am I ready for retirement?” As this growing number of Americans consider the next chapter in their lives, they are discovering a gap in their retirement plan. By proactively planning and establishing priorities in advance, individuals will be better equipped to have a successful transition into their golden years. Whether retirement is right around the corner or 20 years away, these key considerations can help establish a level-set for retirement preparation.
What’s your number?
Are you ready for retirement? First ask yourself, “How much money do I need to live?” and, “How much money do I have?” These questions can help establish a goal and define areas that should be closely analyzed. If financial gaps exist, assess and determine how to fill them. It is important to consider the financial implications of several critical areas, including:
- Average living expenses
- Healthcare
- Mortgage or rent
- Property and other tax obligations
- Charitable giving
- Legacy considerations
How much and how long do you want to work?
Over the last 15 years, a shift has been taking place—it no longer has to be “all or nothing” when it comes to employment. More people are retiring in stages, or semi-retiring. Instead of completely stepping away from a career, they might transition out of a role slowly. Additionally, many Americans are planning to work longer or stay involved in their businesses beyond what is considered traditional retirement. The U.S. Bureau of Labor Statistics‡ projects that by 2024, 13 million people age 65 and older will still be working. Think about where you would like to be on this spectrum to help determine when, and to what degree, your earning potential will change.
Establish priorities
If the priority is being ready for retirement, establish goals and create a plan first and foremost. Perform an in-depth analysis of your entire financial portfolio to assess total assets and decide if retirement goals are achievable. Determine if your portfolio assets can support your desired lifestyle during retirement. If a path to retirement is clear, then begin to think about secondary priorities; these could include leaving a legacy, charitable giving or the opportunity to travel more often. If the path to retirement isn’t clear or if financial assets come up short, consider putting off retirement for a few years, saving more money, adjusting an estimated living plan or reassessing assets.
Create a clear plan
Planning is the most important aspect of a successful transition into retirement. Planning early and reevaluating often is critical. One way to establish a sound financial plan is to work with a financial team, who can help you not only establish goals, but work to make them a reality. Additionally, financial teams can help counsel families where members may have different goals or considerations that need to be taken into account. They can help communicate each person’s unique goals and assist families in creating a shared plan that meets everyone’s needs.
Finally, they can also track your progress and help identify any changes you may need to make along the way. For anyone considering retirement, asking the important questions, creating a strategic plan and consistently evaluating progress can help lead to a successful transition. A financial team can alleviate questions and ensure that a plan is being considered from all angles, providing valuable support for this life transition, and helping ensure that you’re ready for retirement.
Four financial factors to consider before retirement
Housing
Housing is often the largest cost in retirement, which makes it a good place to start when considering what moves to make when trying to reduce retirement expenses. If you’re able to pay off your mortgage before retirement that will be one monthly expense you can eliminate. If you’re hoping to also reduce the cost of taxes, insurance and maintenance, downsizing might be a good option too. With this, you’ll also save money on utilities and expenses related to living in certain parts of a city like increased taxes and homeowner’s association (HOA) fees. As mentioned before, moving to a state without income tax such as Tennessee, Florida, Arizona and Texas is another way to save.
Taxes
When making a withdrawal from traditional 401(k)s and IRAs, you’ll be expected to pay income tax on each one. If your retirement income is over a certain amount, part of your Social Security benefit might also be taxed. With the help of tax strategies, you can minimize what the government takes from you. These strategies include moving to a state that doesn’t charge income tax, delaying receipt of benefits until age 70 and reassessing your investment holdings.
Healthcare
The estimated cost of healthcare during retirement is $165,000 for an individual, according to Fidelity‡. The amount is up almost 5% from 2023 the same article reads. This is a rapidly growing number and you should investigate if and how you will be covered by Medicare. This program can offset some healthcare costs for you, but since it is ever changing, it is important to talk to a knowledgeable team to see how you can and should prepare. A smart way to save for these and overall healthcare expenses is through a health savings account (HSA).
Emergencies
It may seem surprising, but it’s important for retirees to have a separate amount of saved money within their savings account to help protect the income you’ll live on during retirement. Unexpected costs including health expenses and family emergencies may come up and reduce your monthly income—and you won’t be able to make that money back on a fixed income unless you go back to work. Another reason is that an emergency fund can take the stress off your finances should your retirement account experience a down market. The supplement income will provide potentially critical support while the market recovers.
If you are ready to start preparing for the golden years of life, contact a financial team to review your financial plan and walk you through your options for retirement.
Optimize your retirement by learning about savings plans, estate planning and wealth transfer in the Preparing for Retirement playlist on the UMB Financial Education Center.
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