What questions do you need to answer before you’re sure you’re financially ready?

retirement planningThe day is finally approaching. You’ve been saving and investing most of your adult life for this moment, but now you’re not so sure you’re really ready to retire. It’s a predicament faced by many employees that we work with. While retirement readiness has many non-financial components to it, here’s how you can know if you’re financially ready to retire:

1) How much income will you need? Don’t make the mistake of “guestimating” your expenses. That might be fine when you’re decades away, but you don’t want to discover that you’ve underestimated your income needs several months into retirement. Start by tracking your actual expenses over a few months and then make any adjustments you foresee to your lifestyle (like downsizing or relocating) to create a retirement budget. (You can use this calculator by AARP to estimate your health care expenses.)

2) What will you be receiving from Social Security? You can run a projection on the Social Security web site and enter the exact age you plan to collect. If you’re married, don’t forget that you and your spouse get the higher of your own benefit or a spousal benefit that’s about 1/2 the other spouse’s full Social Security benefit.

3) What other income will you be receiving? If you’re fortunate enough to qualify for a pension, get a pension estimate. Include net rental income from any real estate you own. I’d be hesitant about including income from a part-time job or business since you don’t know how long that income will last.

4) How much can you safely withdraw from your retirement savings? Add up all of your retirement savings, including retirement plans from previous jobs, your current employer’s plan, IRAs, and any other investment accounts intended for retirement. Then multiply that total by 4%, which has been found to be the historical safe inflation-adjusted withdrawal rate from a diversified portfolio over 30 years. (If your portfolio includes small cap stocks, you can increase that withdrawal rate to 4.5%.)

5) How much will you owe in taxes? Your taxes will vary based on your mix of income sources and what state you retire in. You can use this site to estimate your retirement tax liability based on those variables.

If your retirement expenses and taxes are more than your retirement income, you may want to consider reducing your retirement expenses, purchasing an immediate income annuity, taking out a reverse mortgage, or working a bit longer. Otherwise, you probably have the financial resources to retire. Here are a few steps you can take to help make sure you stay that way:

1) Make sure your portfolio is diversified and low cost. Keep in mind that the 4% rule was based on a diversified portfolio of market indexes. The simplest way to mimic that is with a target date retirement income fund made up of index funds since they’re designed to be fully-diversified “one stop shops” for people in or approaching retirement. If you prefer a more customized approach, consider using a low cost robo-advisor tool that can design a portfolio for you.

2) Consider long term care insurance. You can see your entire nest egg wiped out by long term care costs. That’s because Medicare and other health insurance policies don’t cover it. Medicaid does but it’s a poverty program that requires you to spend down virtually all of your assets to qualify and many places don’t accept Medicaid.

Long term care insurance can protect your assets and your choice of care. In particular, see if your state offers a long term care partnership program. Purchasing a policy through one of these programs can protect your assets even if you use up all the insurance benefits and have to rely on Medicaid.

3) Have a withdrawal strategy. It’s not just how much you’re withdrawing but where you’re withdrawing from. If you’re withdrawing from pre-tax as well as tax-free (Roth) and regular investment accounts, you have the opportunity to structure your withdrawals to minimize taxes and even reduce health care costs in retirement. If your situation is complex, this is an area where a tax-aware financial advisor can be helpful.

The idea of retirement can be both exciting and terrifying. Hopefully by following these steps, you can make it more of the former and less of the latter. Are you ready?


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1 ssa.gov/news/press/factsheets/women-alt.pdf [9/16]
2 thestreet.com/story/13415225/1/are-you-tapping-all-top-10-sources-of-retirement-income.html [1/7/16]