Senior Finance: How To Determine If You Are Ready For Retirement

piggybankEntering The “Retirement Zone”: Is This The Right Time For You To Retire?

If you are contemplating retiring sometime within the next five years, you are now considered to be in the “retirement zone.” This time period is very important, since you will have a number of critical choices to consider and whatever you do now will have long-term consequences. The “retirement zone” is a transition period during which your mindset will shift from accumulating retirement funds to choosing how to distribute assets and drawing on the wealth you have accumulated. It is chaotic and confusing for many people, but it does not have to be that way.

A thorough understanding of the issues you face and the long-lasting effects of your decisions is key to making everything go smoothly as you enter retirement.

  • Tip: You are still in the “retirement zone” if you have retired recently. Some of the choices you have made can be re-evaluated if you feel it is necessary to make changes in light of your current circumstances.

Are you really ready for retirement?

You need to serious ask yourself if you are really ready to retire. This is not always the easiest question to answer because there are actually two aspects you need to consider. The first is if you can afford to retire on a financial level and have the lifestyle you want. But the other main consideration – often not considered fully by those in the retirement zone – is how prepared you are on an emotional level to begin this new phase of life.

Retiring before you are absolutely sure you are ready, both emotionally and financially, can strain even the best retirement plan.

  • Tip: You will not always find the “right” time to retire. However, there is certainly a wrong time to retire. For instance, you may not be emotionally ready for retirement even of you have reached a certain age of 62 – 70 or so. Retiring on age alone does not mean you are emotionally ready for that step. Postponing the date, as a matter of fact, can help with the financial part of the equation. If you feel emotionally ready but the finances are coming up short, reconsider if your plans are actually realistic. Evaluate what it would mean financially if you postpone the date, and then make an informed decision.

Financial Readiness: Start with the basics

If you have not yet projected the amount of annual income you will need during retirement, take some time to do it now. Start with all the basic costs such as housing, food, health care, transportation and long-term care. You may also want to consider difference scenarios, such as needing to move to an assisted living or constant care facility at some point down the road. If your plans include travel, estimate an annual amount for that. Also include any commitments to other family members or gifts you want to give, in your calculations. Make your plan as detailed as possible so that you will have no surprises later. If you do not retire immediately, update your calculations at least yearly to account for inflation or other changes.

Estimate any benefits you will have from a traditional pension from employment and from Social Security. Next, compare that figure with the projected amount you will need in retirement. Depending on the difference between the two amounts, you may need to supplement with personal savings. Now is the time to determine if your savings will be sufficient to cover the gap and help provide the income you need in retirement years.

When should you retire?

You need to consider the decision as to when you will retire from every possible angle and situation. Your age when you retire will have a huge  impact on your overall plan. The timing makes a difference because the earlier you retire, the longer your savings will need to stretch, since you will need to start using all your funds sooner. Also, if you retire too early, you will give up prime earning years, during which you could make a substantial addition to your savings toward your later years. Those extra earnings for even a few years can make a great difference!

Inflation will have a greater potential to decrease your purchasing power when you have a longer retirement period for which to plan. That means when you retire early, it is even more important to adjust your overall plan to account for inflation.

At age 62, you can begin to receive early Social Security benefits. However, taking early benefits will reduce your monthly amount and you would receive 20 to 30 percent less than you would have at 65 to 67, depending on the year of your birth. Consider all options and do what makes the most financial sense to you. If you retire early, your benefits may be reduced but you may receive them longer.

If you have a traditional pension plan from an employer, find out if early retirement will have any negative effects on the plan. Retiring early may affect your plan because benefits generally accrue faster in the final employment years. That means that leaving your employment early may reduce your monthly benefits. Be sure you thoroughly understand your payout options and how benefits are calculated.

If you intend to use your 401k before age 55 or your traditional IRA before 59-1/2, you may be charged a 10% penalty over and above any income tax you owe. That usually includes disability payments as well. Also consider how you will use your personal savings, as you may want to use your savings first before withdrawing from your IRA or 401k. Once you reach age 70-1/2, you must take a minimum distribution from an employer-sponsored plan or from any traditional IRA you may have, whether or not you need the funds for your living expenses.

You will be eligible for Medicare once you turn 65. If you retire before that age and have no health insurance benefits from your former employer or your spouse’s plan, you will need to pay for health care out-of-pocket until you reach 65.

Emotional Readiness: Are you emotionally prepared for retirement?

Your retirement plan is actually to make it possible for you to do the things you enjoy doing for as long as you can. But that would mean that you know what you want to spend your time on. Many people do not even think beyond the idea that retiring will be similar to going on an extended vacation, which is our reward for working hard all our lives. It actually may work out that way, at least for the first few weeks or months. In reality, though, your employment demanded your attention and time for most of your days. When you do not have the job anymore, you suddenly find yourself with free time on your hands. This is why you not only need a financial plan for retirement, but you also need to consider how you will keep yourself occupied with meaningful activity.

What would you like to do?

Spend a bit of time thinking about how you would spend an average week. Consider if you want to pursue a hobby or travel, or choose something from the following ideas:

  • Volunteering – You have unique interests and skills that you can share with your community. Day-care centers, community and senior centers, hospitals, nursing homes and tutoring programs are places where your services would be welcomed.
  • Go back to school – Your retired years can be just perfect for gaining more knowledge in your field, pursuing a degree, or learning something entirely different. Many universities and colleges offer special programs and reduced rates for retirees. You could take classes in cooking, gardening, photography or start to learn another language.
  • Start a business or a new career – You may find this is the perfect time to try a new career or open a business of your own that you always wanted. If you plan ahead you will overcome the following problems that many people experience when they attempt to transition into a new lifestyle without a plan:

Consider Potential Emotional Pitfalls

You should also consider whether you are at risk any of these potential (and common) emotional pitfalls.

  • Loss of identity – Many people see their profession as their identity. If your success in your career has given you your feelings of self-worth and affirmed who you are, then giving it up can be unsettling on all levels.
  • Loss of structure – A certain amount of structure in your life is provided by your every day job schedule. You most likely have also formed relationships with coworkers that are important to you. When all that is taken away, you may realize you need to find something to fill your unmet emotional needs
  • Fear of mortality – Rather than seeing these years as a new beginning, some people only see it as the “beginning of the end.” The mental shift from saving for later years to using up accumulated wealth can greatly increase these feelings.
  • Marital discord – Consider whether your spouse will agree with how you want to spend your time when you retire. Many married couples find the transition a bit difficult, especially in the beginning. It is important to discuss your ideas with your spouse as soon as possible when you plan to retire. Consider the effect, both negative and positive, your retirement will have on your marriage and your roles.

Should You Continue To Work Instead?

For non-financial as well as financial reasons, many people choose to continue working after retirement. The greatest benefits of continuing to work is that you will earn money and use less of your savings, which will make your money last longer. Others continue working to stay physically and mentally active and for personal fulfillment. They also enjoy having coworkers and the social benefits of interacting with other people.

If you are considering continuing to work after retiring, be sure you know how working will affect certain aspects, including whether your new employer provide affordable health care. If the answer is yes, this would be a very valuable benefit.

You also need to determine if working after retiring from your main job will mean you can delay receiving Social Security benefits. If it will, then you may receive increased benefits in later years. If you choose to continue receiving Social Security benefits while you work part time, for instance, be sure you understand how it will affect your benefit overall. Generally speaking, $1 will be withheld from your benefits for every $2 you earn. Contact the Social Security office for clarification.

  • Cautionary Tip: Many people who plan to work during retirement discover that they are prevented by health problems or inability to find a job. Keep in mind that continuing to work after retiring is not a guarantee. Therefore, try to have a plan that will cover your basic living expenses to ensure your needs will be met and you can enjoy the retired years you have been looking forward to for so long!