Are You Ready for Retirement?
You may be thinking about retiring but unsure if you’re ready – financially. Much will depend on your expected lifestyle and sources of retirement income. So, the real question is, “Do you have enough money to cover your living expenses for the rest of your life?”
We’ve identified a few ways to help determine if you have sufficient funds available for your golden years. However, you must decide if that’s truly enough money to support your desired standard of living considering most Americans are living longer than ever. A sharp uptick in life expectancy caught the attention of the U.S. Department of Health and Human Services in 2011. Fewer Americans are dying early from cancer and terminal diseases.
The Social Security Administration (SSA) recommends that Americans consider average life expectancy when making retirement planning decisions. Men and women, on average, live until their mid-80’s. SSA data suggests that one in four 65-year-old Americans will live past 90 and one in ten will have a life expectancy of at least 95.
These numbers are critical to determining if you are ready for retirement since you may need your money to last approximately 30 years. A recent Bankrate.com Financial Milestones Survey found that across generations, e.g., Baby Boomers, Gen X, and Millennials, the early ’60s were said to be the ideal time to retire.
Financial experts generally recommend that Americans plan on living on no less than 80% of their annual pre-tax income. Depending on your expected lifestyle, which might include traveling, some retirees may want to consider a target of 100%.
Now that you have a figure in mind, we need to look at where your retirement income will come from over the next several decades.
Social Security Benefits
The longer you wait to tap into your Social Security benefits, the higher your monthly payment will be. While you can access funds as early as age 62, wait until age 70, and you’ll likely fare much better than someone who chose early retirement.
If you haven’t already done so, create a mySocialSecurity account to receive estimates of your future benefits. Estimates are based on your actual earnings at age 62 and are a key factor if you’ll rely on your Social Security benefits during retirement. Then, use the official Social Security calculator to see what these numbers would look like if you delay claiming your Social Security benefits. For 2018, the maximum monthly benefit at age 70 is $3,698 and only $2,157 at age 62.
The 4% Rule
For many Americans, Social Security benefits alone are not enough to cover even the most frugal budget. Retirees need to have other ways to cover their living expenses. Savings and investment accounts will likely make up the lion’s share of your retirement income.
This 4% retirement rule states that you should plan on withdrawing 4% of your savings the first year and adjust upward for each subsequent year to keep up with inflation. The size of your savings nest egg should sustain you for roughly 30 years. Don’t forget to add other sources of guaranteed income to the equation. This might include alimony, a trust account or a pension plan.
Health Insurance Costs
Did you contribute to a health savings account (HSA) during your working years? This move alone can help keep costs down since you can draw on these funds to cover medical expenses throughout retirement. Medicare and Supplemental Medical Insurance are available after age 65, but that doesn’t mean you should rely on them to cover all of your medical expenses.
The cost of healthcare during retirement is likely to be higher than expected. Even with Medicare benefits, seniors can expect to pay as much as $370,000 for healthcare during retirement. This number might be even higher if you have a chronic health issue, are overweight or smoke. Improve your health to keep costs down.
Still unsure if you have enough money saved for retirement? Use a retirement calculator to get a footing on where you stand as of today. Don’t fret if you think you haven’t saved enough money. Decreasing expenses or delaying retirement might be the best choice for now. Contact Hughes Federal Credit Union to discuss your readiness for retirement. We can help you outline a strategy to include tax planning, retirement distributions, as well as perform a review of your investment accounts to get you on track to a stress-free retirement.