Being prepared for retirement can depend not only on how well you save and invest, but also on how well you consider other necessities, such as health care and even your emotional needs. But not every retiree conducts this type of analysis before making the leap from the workforce.
Before you commit to leaving your career, ask yourself these seven questions to gauge your overall retirement readiness.
1. Is your retirement budget sound?
It’s fairly common to underestimate retirement savings needs, particularly if you haven’t completed a retirement needs calculation.
“Having a deep understanding of one’s current expenses is the first step in predicting future expenses,” says Brooke Bees, a Certified Financial Planner with Mercer Advisors. “Most Americans tend to spend the same amount on lifestyle expenditures like food, entertainment and travel in retirement as they do in the years building up to it.”
Knowing whether you’ve fully funded your 401(k), IRA and savings account requires knowing your spending patterns. There are no shortcuts around plugging in actual numbers.
2. How stable are your investment vehicles?
Market turbulence can dramatically impact a retirement portfolio, particularly during the early years of a withdrawal strategy. There’s usually no new money coming in post-retirement, leading to a limited ability to rebuild assets after a loss. Increasing the number of fixed-income investments (bonds) while decreasing exposure to equities (stocks) can help mitigate risk and boost your portfolio’s stability.
However, “no matter the ratio between stocks and bonds,” says Bees, “being well diversified is paramount. A retirement portfolio’s success should not hinge on one company, industry or country. Diversification remains the best means to reduce risk.”
3. Do you have adequate health care coverage?
Many Americans rely on the health care coverage provided or subsidized by their employer. For many employees, those benefits end once retirement begins, yet a financially healthy retirement depends upon the procurement of proper health care coverage.
According to a recent AARP Health Newsletter article, a couple retiring at age 65 could need a staggering $240,000 to cover future medical costs. This amount assumes the couple is eligible for Medicare coverage (most early retirees are not) and doesn’t include the high costs of long-term care.
4. Are you currently in good health?
Medicare coverage doesn’t begin until age 65, so early retirees ought to consider private health care options to ensure adequate coverage.
“It’s a tough market out there for people between the ages of 50 and 64,” says Ray E. Levitre, Certified Financial Planner and author of “20 Retirement Decisions You Need to Make Right Now.” “This age group … is most likely to be denied coverage or be hit with high insurance premiums that are hard to swallow.”
Levitre says that those with major health concerns may want to think twice about leaving their careers entirely.
“If you have serious health problems, you may want to continue working just enough to keep your coverage,” he says.
5. Are your adult children financially stable?
Not surprisingly, boomerang kids can have a dramatic effect on a retiree’s savings. Equally important, though, is the impact they can have on a retirement vision.
“Downsizing or moving, or even traveling, is often restricted because those dollars get reallocated to supporting their children,” says Bees. She says that it’s important to consider how much the return of an adult child will cost and for how long.
“A few months may not be a threat [but] a few years or a decade is a major concern,” she says. “Whenever there is an increase in expenses that was not planned for, the risk to the retirement nest egg grows.”
6. Is your spouse on board with your retirement plans?
Do you intend to move, downsize or buy a winter home in a warmer climate? Have you agreed on how much to leave your heirs? Are your travel expectations aligned? Unspoken presumptions can dramatically differ, leaving one or both of a couple unprepared for what retirement may bring.
“If you are married, think about retirement as a joint venture,” says Julie Jason, author of “The AARP Retirement Survival Guide.” “Both partners need to understand what’s happening financially … to feel secure.”
7. Do you have a plan for your retirement years?
Stan Hinden, author of “How to Retire Happy,” compares retirement to a trip abroad.
“You wouldn’t just pack a suitcase and board a plane,” he says. You’d read guidebooks about the places you plan to visit and … prepare an itinerary so that you’d know where you were going and when.”
A happy retirement can be defined by what one does during those years: advance a hobby, begin a second career, volunteer or travel. According to Bees, “Our happier retired couples are the ones that are the most active, enjoying life to its fullest — because they planned ahead. It is important to stay active and give life a new purpose.”
If you feel hesitant about your answers to some of the above questions, it may indicate you need to spend some additional time planning — or saving — before jumping into retirement.