How in the world do you determine you’re actually ready to retire? Is it an actual age? I’ve met with some people who feel like once they hit 65, it’s time to retire.
For other people, they feel like once they hit a certain dollar amount in their investments, then that’s when it’s time to call it quits.
Now neither of those answers is necessarily wrong. In fact, given other circumstances in your life, that age (or dollar amount) may signify that you’re ready to retire.
However, from my vantage point, there is a lot more to consider than an age, or a dollar amount.
Rather, there’s a combination of factors that you have to get the proverbial “green light” in order for you to say that you can confidently retire.
Today, I want to cover five essential factors to know that you’re truly ready to retire. Let’s get into it.
Your Finances are Ready
This is the largest factor. Just because you hit age, say 62, doesn’t mean you MUST retire or that you are ready. Many people aren’t financially secure yet.
How do you know if your finances are ready for retirement? Ask yourself:
- Are all my debts paid off or at least close to it?
- Do I have enough money to achieve all of my retirement goals?
- Do I know what I’d like to spend, on a monthly basis, in retirement?
- Do you have a plan to generate income? Will your income last your lifetime?
- Are my spouse and I on the same page in terms of expenses we expect in retirement – knowing that life will change and things may change in the future?
There are more questions that you need to ask, and answer, before you retire, but these are some really important in my mind. If you want to see 65 questions to ask yourself before your retirement, go to freeretirementbooks.com and get my book, 65 Questions To Ask And Answer Before You Retire. I’ve written 3 books, and honestly, this is my favorite one.
You Saved Enough Money and Can Access It
You could have $1 million saved, but if you can’t access it, what good does it do you? Before you retire, make sure you have enough money saved. Lay out your plans, including the following:
- What income will you have coming in right away?
- How accessible is your retirement income?
- What is your strategy for distributing this money?
The last question is vital. Sure, you could access your 401K or IRA early, but it will cost you a 10% penalty plus taxes at your current tax rate. Is it worth it?
Another question to ask yourself is ‘have I tax diversified my retirement accounts?’ Tax diversified accounts relate to how and where you’d access your money. Taxable accounts allow you to access your money at any time without penalty. However, you’ll pay the current tax rate on any proceeds (capital gains). If the profits increase your income enough, they could push you into a higher tax bracket.
Tax-deferred accounts (IRA or 401K) reduce your tax liability today by reducing your taxable income, but you pay taxes on the funds you withdraw during retirement. Many people assume they’ll be in a lower tax bracket when they retire, but no one knows for sure. Having some money in a tax-deferred account may help, but don’t concentrate all your retirement money there.
Tax-free accounts offset the taxes you’d pay on funds distributed from a tax-deferred account. Tax-free accounts are either a Roth IRA or Roth 401K. You don’t get a tax deduction when you contribute, but your money grows tax-free. Any withdrawals you make (following the proper rules) in retirement are also tax-free.
Being properly diversified in terms of your tax buckets can be a great help during your retirement, giving you a lot of flexibility on when and where to take money from, which could prolong how long your funds will last.
You Have Healthcare
Don’t forget about healthcare, it’s one of the most important factors of your retirement. You aren’t eligible for Medicare until age 65 and even with Medicare, you’ll likely want a supplement to cover the costs of what Original Medicare (Parts A and B) insurance doesn’t cover. Medigap/Medicare Supplement or Medicare Advantage plans are you two choices to do that.
If you’re retiring before 65, you’ll want to review your health insurance options and choose good coverage that you can afford. Yes, it’s likely to be expensive, but if you have a proper plan in place, and can afford it, then there’s no reason it should delay your early retirement.
You Have a Plan for When (not if) Markets Perform Poorly
We have to plan for WHEN the market will dip because we all know it will. Looking back at recent history, we’ve got the 2008 housing crisis and economic recession and the latest COVID-19 market drop.
What does the future hold? None of us know.
It’s important to ask yourself, “what will you do when markets go down? How will you generate an income stream if you’re retired?” Will you take too much money out of your portfolio when the market dips? If you do, how do you know your money will last as long as you do?
Planning for the worst is the best way to plan for retirement. If nothing ‘bad’ happens, then great, you’re ahead and consider yourself lucky. But the odds of that happening to us is pretty much nil.
When (not if) the market does dip, you’ll be prepared and won’t find yourself struggling to generate an income from your portfolio.
What’s your Next Step For Post Retirement Life?
This is perhaps one of the most important steps in retirement planning. Finances are important, but you’ve worked hard most of your life to prepare for the ‘golden years’. Have you planned what it will look like?
Ask yourself, how will you spend your time? You’re used to spending most of your day at a 9 to 5 job. Suddenly, you have all this free time, who will you spend it with? How will you stimulate your mind, engage with the community, and spend time with friends?
Remember: You might be retired for 3 or 4 decades! Do you have enough activities, hobbies and interest to fill that time? If the answer is no right now, that’s fine, but it’s something to work on and keep in mind.
Just as you put a lot of thought and effort into how to plan your finances in retirement, also think about what you’ll do with your retirement life, so that you can have the most fulfilling retirement possible.
Retirement Planning is Crucial for Everyone
So that wraps up 5 essential factors in being ready to retire. My main point here is to not focus on an age, or a dollar amount, but rather on how ready you are in terms of achieving your financial and retirement goals, knowing that a solid plan is in place.
If you’d like to work with me in setting up your own retirement plan, I’d be happy to help. You can simply go to StartMyRetirement.US and find a time for us to meet and get to know how I can help you.