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5 Action Items to Complete Before Retiring

retirementThe years leading up to retirement can be a time of both increased excitement and anxiety. For many, retirement offers the possibility of pursuing new opportunities and experiences. However, with this new sense of freedom comes a heightened level of concern in making sure your money lasts. Prior to retiring, there is no substitute for thorough planning and informed decision-making when seeking to create a successful retirement. Make sure you’ve done everything on this checklist before you do retire.

You’ve Defined What You Want to Do

After working most of your life, during retirement, it is time to figure out if you can do what you have always missed out on in life. Some people take up new hobbies such as golf or tennis. Many use this time to travel and see the world. You may decide to spend the wintertime in a warmer climate, either by renting or purchasing a vacation home.

Once you figure out what you want to do during retirement, it is necessary to define, prioritize and quantify it in terms of money. For example, if a retiree wants to spend $50,000 a year on travel, yet only has $600,000 in total assets, this would not be a wise decision. Another step is to prioritize your goals by arranging them in the order from what is most desirable to least desirable. This should help you determine which goals are more important for you to achieve. Once you define and quantify what you want to do in retirement, this is a sign you are ready and should help you determine how much extra money you need to allocate.

You’ve Established a Budget

One of the most common mistakes retirees make is understating their needed income during retirement. It used to be a rule of thumb to use 60 to 80% of your current working income as your expected retirement income. However, this can cause a variety of issues, and the number one reason why retirees run out of money during retirement is because of poor budgeting skills. Look at your current budget. Determine your monthly expenses and figure out if they are going to increase, decrease or stay the same during retirement. Many retirees make the mistake of assuming expenses go down. However, if you decide to buy a second vacation home, this adds an additional monthly mortgage payment, along with taxes, utilities, association fees and general maintenance. Once you determine exactly what you want to do during retirement, you can figure out if it fits into your budget.

Once you establish a retirement budget, factor in that this amount will grow at an inflationary rate of 3 to 4% per year. Even though this may seem high, it is much better to be conservative over the long run. Overestimating inflation only leads to having more assets left to your heirs instead of having a chance of running out of money. To illustrate the effects of inflation, a $50,000 retirement income stream would be worth $67,195 in 10 years. The same $50,000 would be worth $90,305 after 20 years. Inflation is one of the biggest risks that retirees face during the latter half of their lives, so it is extremely important to plan for it ahead of time.

You Know Your Health Care Options

Most people assume that when they retire, health care is taken care of, as once a person turns 65, he automatically qualifies for Medicare coverage. However, make sure you qualify for premium-free Part A coverage. You qualify if you have worked at least 40 quarters of coverage and paid the appropriate Medicare payroll tax. You may also qualify if your spouse has worked 40 quarters of coverage. If you do not qualify, the 2016 premium rate for Part A could be as much as $411 a month. This could be an unforeseen expense that cuts into your retirement nest egg.

As most retirees qualify for a premium-free Part A, it is still important to know how Medicare works with your existing physicians and treatments. Many doctors may not take Medicare as a form of payment, and this should be considered. Part B, which helps pay for doctors’ services, outpatient hospital care and medical equipment is usually recommended for most retirees. To enroll, the average retiree pays Medicare Part B premiums of $121.80 a month as of 2016. Medicare also offers Plan C and Plan D as additional purchase options to help reduce overall health costs. Prior to enrolling in Medicare, understand what each part costs and what services it covers. Many retirees have gone to third-party vendors for supplemental health care in addition to Medicare.

If you decide to retire prior to age 65, health care is a very critical issue. Unless your previous employer structured a retirement benefits package, you will have to seek a third-party health care service. This plan needs to “fill the gap” between the present time and when you turn 65. These plans can be very costly depending on your health condition. This health care expense is often overlooked by those planning to retire prior to age 65.

You Are Sure You Have Enough Money

When most people begin planning for retirement, the income-planning segment is a common place to start. However, you should start with quantifying exactly how much is needed on an expense basis. The first step is to determine how much your stable income streams are going to pay. These include any pensions, Social Security and annuities. Most retirees make the mistake of taking Social Security too early without doing proper research first. Any withdrawals taken prior to your full retirement age cause a permanent reduction in your benefit. If you decide to continue working past your full retirement age, taking Social Security in addition to your employment income might make it taxable. Plus, delaying Social Security causes your benefit to grow at a guaranteed rate.

Once both amounts and the timing of these income streams are determined, you can decide how much to withdraw from savings. As a rule of thumb, most retirees should take a maximum of 3 to 4% from a portfolio. Anything above this rate significantly increases the risk of depleting funds early. For example, for a nest egg totaling $1 million, the total withdrawal rate should not exceed $40,000. If the money remains in a noninterest-bearing account and the withdrawal rate increases by 3% inflation each year, the $1 million would last just over 19 years. Increasing the withdrawal rate by 1% reduces that same timeline by three years and the $1 million will last only 16 years. This also demonstrates the importance of investing, as inflation erodes the longevity of your retirement portfolio. When entering retirement, you should have a healthy blend of income-producing and growth investments. Although it may seem logical at first to generate the 3 to 4% from fixed income, inflation eventually affects the total performance. Due to advances in health care, the average person could spend almost 25 to 30 years in retirement. This is considered a long-term investment horizon that warrants investing in some growth investments.

You Have Developed a Retirement Plan

If you have all four signs completed above, you should be comfortable in knowing you have taken great steps in securing a successful retirement lifestyle. However, both life and retirement constantly change. Markets move up and down. Unforeseen events occur for which you cannot plan. This is why it is important to have ongoing monitoring and adjustments made to a retirement plan. These adjustments could be made to withdrawal rates, risk tolerance of investments or even having to give up on a retirement goal. Either way, it is very necessary to continually monitor and adjust a retirement plan over the rest of your life.

The Bottom Line

You are ready to retire if you have defined what you want to do, established a budget, determined your health care, have enough money and developed a retirement plan. Missing any one of these crucial signs could negatively affect your ability to stay retired. There are many resources available regarding retirement planning, but it is always recommended to meet with a financial advisor or Certified Financial Planner to confirm you are taking the correct path for the rest of your life.

Source:http://www.investopedia.com/articles/personal-finance/010616/5-signs-you-are-ok-retire.asp