Are you ready for retirement? You may be someone who has
looked forward to retiring from the day you started working, or maybe you won't
ever completely stop working.
No matter what you've envisioned, it's a very important
milestone, and the retirement date you choose will be defined by more than just
your age. You should also consider these four things.
1. You've evaluated your Social Security options
Navigating Social Security can seem complex, but learning
about the program before you retire can help you make a decision that's best
for you. If you take your benefit at your full retirement age (FRA), which is
either 66, 67, or somewhere in between, you will receive your standard benefit.
You can take Social Security as soon as age 62, but your benefit will be
reduced for every month that you start it early. You can also delay it to age
70, and you'll get a bigger benefit for every month past your FRA that you
wait.
For example, if your FRA is 66 and your standard benefit is
$2,000, your reduced benefit at age 62 will be $1,500, while your delayed
benefit at age 70 will be $2,640. If you live to 75, you will receive $234,000
in total lifetime income with your early benefit, $216,000 from your standard
benefit, and $158,400 from your delayed benefit. If you live until 80, your
reduced benefit will pay you a total of $324,00, your standard benefit
$336,000, and your delayed benefit $316,800. But if you live to 90, your early
benefit will pay you $504,000, your standard benefit $576,000, and your delayed
benefit $633,600.
When you take Social Security may be based on your income needs.
But if that's not your primary deciding factor, things like longevity could
play a huge role in how much you can receive over your lifetime. If you have
health issues, it may make sense to claim it early. But the longer you expect
to live, the more sense delaying it makes.
2. You've created a budget
Your budget will take into account your income in retirement
and your expenses. Your income will come from Social Security, a pension, or
investments like dividend-paying stocks, and your expenses will include things
like your mortgage, healthcare, or a car loan.
If you eliminate a lot of your expenses before you retire,
the amount of money you need month to month could be a lot lower than while you
were working. But it could stay relatively the same if you don't cut expenses,
or if you replace them with other things like hobbies and travel.
Creating a budget will give you a good idea in advance of
what your expenses will be. If you have a shortfall, you can find more ways to
earn income -- like part-time work after you've retired. Or try to figure out
which expenses can be further reduced. Your medical expenses will have very
little flexibility, for example, but your travel budget can be altered as
necessary.
3. You've saved enough (or have a plan for addressing
shortfalls)
Another way to make up for shortfalls in retirement is with
retirement savings. For instance, if your income in retirement will be $30,000
a year, but your expenses are $50,000, you'll need another $20,000 annually
from your savings. Experts agree that taking no more than about 4% each year
from your retirement assets is a good way of ensuring that you don't run out of
money. In this scenario, generating $20,000 a year from savings would require a
balance of $500,000.
If you don't have that much saved, consider increasing your
contributions before you retire. If you are five years away from your ideal
retirement date, maxing out your 401(k) every year with a $19,500 contribution
plus the $6,500 catch-up allowance would add up to $130,000 over five years --
and it could grow even more with positive stock market returns.
4. You've thought about what life in retirement looks
like and are emotionally ready
You may have given a lot of consideration to the financial
aspects of retirement, but how much have you thought about the emotional side?
Depending on how old you were when you started working, you could spend
anywhere from 30 to 40 years of your life working 40 hours or more a week.
One sign that you may be ready for retirement is that you've
thought about how you will fill this time. Maybe you want to spend your
retirement years traveling or pursuing hobbies. Or perhaps you plan on working
part-time or volunteering. Figuring all of this out in advance can help you
make the most of this period of your life.
You could potentially spend decades in retirement. And when
you start should involve more than just turning a certain age. Making sure that
you're financially and mentally prepared can help ensure these special years
are even more fulfilling.
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