Whether you’ve spent much of your adult life seeking financial independence for an early retirement or are facing a milestone birthday, you may be mulling over the thought of leaving the 9-to-5 world for good, but there are a lot more questions to ask then how much will my social security benefits be.
However, few life circumstances can strike such a blow as being driven back into the workforce after getting just a taste of retirement. Before you turn in your retirement notice, you’ll want to ensure you’ve set yourself up to live a comfortable lifestyle with a portfolio that can weather whatever market conditions may await.
Read on for seven important questions that can help you make sure you’re ready to retire.
The following is our rough coverage of the 2021 Sohn Investment Conference, which is being held virtually and features Brad Gerstner, Bill Gurley, Octahedron's Ram Parameswaran, Glenernie's Andrew Nunneley, and Lux's Josh Wolfe. Q1 2021 hedge fund letters, conferences and more Keep checking back as we will be updating this post as the conference goes Read More
1. Can You Afford to Retire?
This is a simple question with a complex answer, as the affordability question can vary widely from person to person.
First, you’ll want to create a spending plan. While many retirement calculators project that you’ll need a certain percentage of your pre-retirement income during each year of retirement, these calculators often fail to account for factors like the lower tax rates that accompany a lower income. The best way to determine how much income you’ll need to generate from your investments (or other sources) is simply to add up all your monthly, quarterly, and annual bills and divide by 12.
You’ll also want to take your current savings rate into account. For those who are already saving a substantial percentage of their pre-tax income, living on half—or less—of this income in retirement without funding these additional savings buckets may not feel like much of a change.
2. Are You Ready to Retire?
It’s important not to overlook the non-financial aspects of retired life. If you’re the type of person whose identity is deeply intertwined with your profession, or if you’ve let many of your former hobbies fall by the wayside during your working years, you’ll want to dedicate some time to thinking about how you’ll fill your time in retirement.
Many retirees can find that volunteering for a charitable cause, joining an athletic league, or even doing a bit of consulting work in their former field can help ease the transition from full-time work to full-time retirement.
3. How Do Social Security benefits Fit Into Your Retirement Plans?
If you’ve been banking on Social Security benefits to finance your retirement, you may want to reconsider.
Even if you don’t think the current administration (or future ones) will cut Social Security benefits for prospective or recent retirees, it’s unlikely that the cost of living adjustments (COLAs) on your Social Security benefits will be sufficient to match the inflation rate, ultimately decreasing your purchasing power over the years.
Instead, staying invested in the stock market with an eye toward future value can ensure your nest egg continues to grow even after you stop adding to it, allowing you to supplement your Social Security benefits (and other retirement income) as needed.
4. Do You Have A Pension?
Those who are covered by an employer’s defined benefit plan or other type of pension can gain some additional security from a source of retirement income that isn’t dependent upon market fluctuations. However, many employees have been dismayed to discover, on the eve of retirement, that their projected benefits are significantly less than they expected.
It can be worthwhile to meet with a representative of your Human Resources department or your pension fund to get some more detailed information on how to access your pension and the level and distribution of benefits you can expect.
5. When Do You Take Money Out of an IRA?
Once you reach the halfway mark of your 59th year on the planet, you’ll be able to take penalty-free withdrawals from your traditional or Roth IRA. But just because you can withdraw from your IRA at this age doesn’t mean you should. You’ll want to consider the balance and tax treatment of each of your investment accounts before making your first withdrawal.
For example, if you’re in a relatively low tax bracket during your first year of retirement, it may make more sense to withdraw needed funds from a traditional IRA, paying a reduced tax rate, while saving your tax-free Roth withdrawals for a year when your taxable income is higher.
After your 70th birthday, you may be forced to take annual required minimum distributions (RMDs) from your traditional IRA, 401(k), or other retirement account. However, Roth IRAs aren’t subject to this requirement.
6. How Should You Invest During Retirement?
Even if you think you have a sufficient asset base to retire, inflation can deplete your nest egg over the years. Thinking back to the average cost of some basic staples—like a gallon of gasoline, a loaf of bread, or a pound of hamburger—when you got your driver’s license can put into perspective the significant rise in consumer prices over the last few decades.
Because of this, it’s crucial to keep the bulk of your retirement funds in the stock market; doing so provides essentially your only opportunity of beating inflation during your retirement.
I wrote an article here that explains the benefits of compound interest after retirement for anyone who is unfamiliar it.
7. What Can You Do for Health Insurance?
Those whose spouses are planning to remain employed for another few years can often put this decision off by enrolling in your spouse’s employer-sponsored plan; however, if your spouse doesn’t have access to health insurance or is planning to retire along with you, you’ll both need an insurance plan and a way to pay for it.
While Medicare coverage kicks in at age 65 for most workers, those who retire early will need some coverage to fill the gap. In addition, those who have worked in a FICA-exempt job or who haven’t paid Social Security benefits taxes over the years (like certain government employees or schoolteachers) may not be eligible for Medicare even after age 65. You’ll want to do some shopping for insurance on the private market while looking into your Medicare eligibility before giving up your own employer-sponsored healthcare coverage.
Retirement really is a life changing event so be sure to plan for it properly. With the right amount of foresight and thought, anyone can retire comfortably. If you want more tips on preparing for retirement, then you might appreciate the information provided in this post, which covers everything from getting rid of debt to opening a trading account.
Now go have fun!
About Phil Town – Phil Town is the founder of Rule One Investing, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on Facebook, Twitter, and YouTube.