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3 Key Steps Before Considering Retirement
Many investors spend years looking forward to their 67th birthday, around which they plan to finally retire after decades of hard work.
While it would be ideal for everyone to have the option to wrap up their career at that “magic number,” it is important to make sure that you are financially prepared to do so. As Americans continue to live longer, retirement savings now need to last upward of 30, even 40 years.
Unfortunately, many people forfeit a monthly income far too early and run out of money sooner than they planned, whether it’s due to old age or a high-expense lifestyle that simply cannot be sustained by their nest egg.
Take these three steps to ensure you can truly rest easy once you say farewell to the 9-to-5:
- Calculate what your desired lifestyle will cost and determine if you can afford it.
- Prepare for expensive health care costs.
- Update your estate plan and consider discussing it with your family.
Can You Afford Your Lifestyle?
It is essential to begin envisioning what you want your retirement years to look like and then plan for how to achieve that lifestyle early on in your wealth-building years.
Consider all the expenses you expect to incur, such as housing, vacations and travel, membership dues, charitable contributions, and familial support. Make sure you’re factoring in all the “extras” that you might incur from new ventures or hobbies you expect to take on in retirement, from flood insurance or homeowners association fees for a vacation home to ongoing maintenance or slip rentals for a boat.
Then, calculate whether you will have enough savings to afford that lifestyle throughout your retirement years without running out of money. Given increased life expectancy, it is advisable to assume you will live to be 100.
As part of this exercise, determine how much you would need to accumulate in order to draw down 5% in each year of retirement while still preserving your assets.
For example, if you believe you will need $250,000 a year to maintain the lifestyle you want, a retirement investment portfolio of $5 million would allow you to draw down the $250,000 each year without touching your principal.
Consider working with a trusted financial advisor who can help make sure that your investment strategy will allow for a 5% distribution each year once you retire.
Prepare for Expensive Health Care Costs
With health care becoming increasingly expensive, it is important to think about how to handle medical expenses once you are out of the workforce and no longer receiving health insurance through an employer.
If your net worth is less than $5 million, consider purchasing a long-term care insurance policy that will help cover services you may need down the road, such as boarding at an assisted living facility or a continuing care retirement community.
In addition, Medicare supplement insurance plans can help bridge the gap in health care costs not covered by Medicare.
Update and Discuss Your Estate Plan
Although you likely already created an estate plan early on in your wealth-building years (if you haven’t yet, start now!), it is generally advisable to revisit it periodically and ensure it still aligns with your current financial situation, relationships and wishes.
Although conversations about death and money can be difficult, speak with at least one family member or heir about your plan so they are aware of your desires and have, at the very least, a high-level understanding of what they should expect to receive.
You should also make sure they know where to find your will, medical directive and other important documents.
Arming someone else with information will not only help ensure your wishes are carried out, but it also lessens the burden for your loved ones when the inevitable occurs.
While it can be tempting to retire as early as possible, reaching the level of savings that will ensure you can live comfortably and enjoy your retirement years to their fullest will be well worth the wait.
