Retirement is the next frontier for many professionals in their 50s and 60s, but the reality of actually retiring in the next few years can seem daunting. Even if you’ve saved well, minimized your expenses, and feel emotionally ready to embark on this exciting new chapter, it’s hard to know if you’re truly ready for retirement. There are so many “what-ifs” it’s easy to second guess yourself:
- What if I haven’t saved enough?
- What if my portfolio isn’t organized to support my cash flow needs for the rest of my life?
- What if I need long-term care or have a medical emergency?
- What if I don’t like being retired as much as I thought I would?
These are normal and valid questions most everyone experiences, so you’re not alone. Here are five key signs you may be ready to take the ultimate retirement leap.
1. You’re Financially Ready
Although retirement can feel emotionally complex, it can help to start with the financial side of retirement planning. When you assess your financial readiness to retire, you get a clear picture of your retirement timeline.
Evaluate Savings and Liabilities. Starting at square one, evaluate your full retirement savings picture. Add up all savings you currently have: company 401(k)s, stock options, cash savings, brokerage accounts, and IRAs (Traditional or Roth). Then, tabulate your total liabilities – auto loans, mortgage, anything that will be an ongoing expense. Where do you come out after subtracting your liabilities from your savings? Will that number be “enough” if you retired tomorrow? This is a helpful indicator to know exactly where you stand as you look ahead to retirement.
Review Your Investment “Buckets.” As you approach retirement, you may want to consider reorganizing your portfolio into different investment “buckets.” You’ll need a larger cash or low-risk investment reserve at your disposal to draw from in the near future. Then, you can create a mid-term and long-term investment bucket to continue investing, ideally achieving capital gains depending on your unique retirement goals and timeline.
Calculate Your Retirement Expenses. Retirement expenses may be more complex than you initially realized. It’s helpful to look at what you currently spend each year. Taking an average of three to four years of credit card and bank statements is a solid place to start. From there, add any retirement-specific expenses (healthcare premiums, “bucket list” trips, a second mortgage on a snowbird condo, etc.). Then, multiply your annual number by how many years you expect to be retired. Remember: play the long game. It’s best to account for longevity in your planning to ensure you can live comfortably for the rest of your life.
Evaluate Your Pension. If you have a pension, it’s wise to research what options you have for taking your benefit in advance. You may choose a lump sum option to invest the funds yourself, or look into what annuity options are available to lock in monthly cash flow for you (and potentially your spouse or partner).
Understand Social Security. Social Security is another question mark many people have about their retirement cash flow. Start by using the Social Security Administration’s “Quick Calculator” to estimate your benefit, and make a game plan for when you want to take your benefit.
Bridging the Gap. Even with all of your different retirement cash flow sources, you may find it won’t be enough to cover your expenses. This indicates you may not be ready to retire yet. In this case, you have two options:
- Delay retirement and continue saving until you achieve a number that feels more comfortable.
- Reduce expenses where you can. This may mean downsizing, reevaluating your lifestyle expectations, or working to pay off debt prior to retirement.
2. You Have a Healthcare Gameplan
The majority of retirees use Medicare for healthcare in retirement. However, it’s prudent to research your options in advance to ensure you understand expenses and avoid a gap in coverage. For example, although you may automatically be enrolled in Medicare Part A (hospital coverage), you may also need Medicare Part B (medically necessary coverage, such as doctor’s appointments) or Part D (prescription drug plans). Alternatively, you may research Medicare Advantage plans and find a more comprehensive fit that works better for your unique needs.
It’s also wise to leverage a Health Savings Account (HSA) in the run-up to retirement. Contributions to your HSA reduce your taxable income and can be used in retirement for things like Medicare premiums, deductibles, or other medically necessary expenses like prescription costs and vision care.
3. You Have a Tax Strategy
Since your retirement “income” doesn’t come from a traditional employer, nobody is withholding income taxes for you. This means you have to consider how taxes will impact your cash flow. The good news is you have some control over how you’re taxed in retirement.
In general, there are two different types of retirement savings accounts:
- Accounts Funded with Pre-Tax Dollars. This includes your 401(k) and Traditional IRA. These accounts can be fantastic because they’ve reduced your taxable income during your career. However, it also means any distributions taken from the account in retirement count as taxable income.
- Accounts Funded with Post-Tax Dollars. These accounts are funded with money that’s already been taxed during your career. These are accounts like Roth IRAs and Roth 401(k)s.
Your goal in retirement is to reduce your tax burden and maximize cash flow to live a life you love. In the run-up to retirement, you can create a strategy to reduce your total tax liability. Here are a few ways to start:
- Consider a Backdoor Roth IRA or a Rollover. You can take funds from an account funded with pre-tax dollars and roll them into a Roth IRA. This can help reduce your retirement tax burden as you won’t owe income taxes on distributions from a Roth IRA.
- Understand your Required Minimum Distributions (RMDs). If you have money saved in a 401(k) or other taxable account, you’ll be required to take a distribution each year after age 72. Take time to determine how much you’ll be required to distribute from these accounts in retirement and estimate what taxes will be owed.
- Look at Charitable Gifting Strategies. Many Abacus clients are charitably inclined. Beyond the fulfillment charitable giving can instill, it can also make a positive impact in retirement to reduce your taxable income. For example, you can route your RMDs to charitable donations (called Qualified Charitable Donations (QCDs)) to reduce your tax liability while doing some good.
4. You’ve Thought About Your Retirement Lifestyle
Perhaps the largest pillar of your retirement plan is planning your lifestyle. Although it’s easy to get lost in the financial details of retirement planning, the best-laid plan will fall apart if you aren’t building toward an authentic life you’ll genuinely love during this next chapter.
Assess Your Emotional Readiness. The transition to retirement can be a challenge. Thoughtfully consider what you’ll do in lieu of your career; imagine what will fill your time and fuel you.
Think About Your Health and Well-Being. Finding social connections and building a community that supports your physical and mental health can be critical. This might look like attending different social clubs, engaging in a fitness routine, getting outside more, or meeting with a therapist or doctor regularly to check in.
Consider Lifestyle Changes. Are you planning to make a change in retirement? Whether moving across the country or just picking up a new hobby like gardening or kayaking, it’s worth thinking through how you want your lifestyle to look the same (or different) than what it currently entails.
5. You’re Working with a Financial Planner
Partnering with a financial planner can not only help you determine the financial side of your retirement, but also work through any lifestyle changes and questions you may have. Having a trusted partner to help ensure you transition in a way that feels aligned with your unique goals and values can make a huge difference in bringing peace and ease to your thoughts about the future.
Every day, Abacus helps clients expand what is possible with money and plan for an authentic and impactful future. Schedule a call today to find out how we can help bring your retirement into focus.
