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Am I ready to retire?

5 key factors to consider before you retire

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Retirement - the biggest purchase of your life

Most retirees at age 65 can expect to live another 25, 30 or more years.

Recent survey indicated that only 23% of babyboomers believed they had done a “decent job” of preparing for retirement.

Planning and preparation are the best ways to be confident that you are ready to retire.

5 factors to consider before you pull the plug:

financial readiness, debt, health care, contingency plans, and purpose

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I am financially prepared?

Are my sources of income in retirement greater than my anticipated retirement expenses?

Do I have multiple sources of income?

Do I have a solid budget for retirement expenses?

Do I have a financial plan?

Withdrawals and distributions, taxes, social security, RMDs, anticipated and unanticipated expenses, insurance and protection

The first major factor is financial. Am I financially prepared to retire?

There are several financial items you must understand and have in order if you are to be confident as you enter retirement.

First is what are my sources of income in retirement?

Most Americans are relying upon Social Security to provide a portion of their retirement income. Nearly 90% of those 65 and over receive Social Security.

In June of 2019, the Social Security Administration reported that 44.5 million retired workers collection over $65 billion in social security retirement benefits, with an average monthly benefit of $1,471.

Military retirees also have an advantage in that they receive a military retirement pension, which is a steady source of retirement income. Some veterans who have worked as a government employee or in the private sector may also qualify for a employer based retirement pension, although these are becoming more rare.

Without a pension, retirees will have to look at their savings in qualified accounts such as IRAs and 40 and other non-qualified accounts as sources of income in retirement.

Once you understand what your sources of income will be then you need to look at your retirement budget. What expenses will you encounter in retirement?

Once you retire, some expenses will be reduced or go away. You won’t have to chip in for expensive business suits and commuting expenses. However, other expenses may go up depending upon your anticipated lifestyle, such as travel expenses and health care premiums.

Most importantly as you approach retirement, you should have a financial plan. A comprehensive financial plan will consider many options and possibilities in retirement. It will take into account taxes and required minimum distributions, anticipated expenses (such as a big cruise) and unanticipated expenses (such as the transmission dying in your RV). Also, your financial plan should take into account protection of your assets, such as life insurance, health, and long term care insurance.

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Have I eliminated debt?

In retirement you want to have confidence that your fixed income streams and retirement assets can cover you expenses. Eliminating debt will allow more of your income to be used for your retirement lifestyle and not paying for past purchases (debt)

Pay off the mortgage.

Eliminate consumer debt and any student loans.

Now that we have looked at our retirement budget, there is one major financial monkey wrench that could derail your retirement. This is debt. A good rule of thumb upon approaching retirement is to have your mortgage and any other consumer debt paid off prior to retiring. This will eliminate the payments for debt service to be removed from your retirement expenses and provide you with peace of mind in retirement. Eliminating debt will allow more of your fixed income sources to be used towards your retirement lifestyle instead of paying for purchases you made in the past, ie your debt.

Consumer debt primarily includes items such as credit card and car payments but also include medical debt and student loan debt for some. Now we normally associate student loan debt with the younger generation, I would like to add another consideration. If you still have dependents while approaching retirement (as many babyboomers still do), maybe grandchild or an adult child lives with you, then these financial obligation needs to be considered and discussed before you make the decision to retire.

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Do I have sufficient health insurance?

Medical expenses will continue to grow through the retirement years as our health deteriorates.

Medicare becomes available for most retirees at age 65.

If you retire before 65, you will need to pay out of pocket for health care.

Military retirees will retain Tricare benefits, but it will convert to Tricare for Life in combination with Medicare at age 65.

May consider working a bit longer to keep an employer’s health care plan or purchasing a High Deductible plan.

We all know that as we age, our health changes. Health costs continue to rise and may become a significant portion of your retirement expenses. From 2012 to 2016, healthcare prices increased by about 16% across the nation, which was about three times the general inflation rate. (https://www.modernhealthcare.com/article/20181025/NEWS/181029946/healthcare-price-growth-significantly-outpaces-inflation)

Before you retire, you most likely participated in an employer sponsored health care program. This may go away once you decide to retire.

Medicare, a government sponsored health program, is available once you turn age 65. However, if you retire prior to age 65, you must find an alternative health care insurance and pay for the premiums it out of pocket.

For those of you who have had retired from the military, you have a great healthcare plan with TRICARE, however, when you reach 65, you too will have to enroll in Medicare and this combined with Tricare is known as Tricare for Life.

Two options for health care is to work a bit longer to keep your employer provided health care plan or to contribute to a Health Care Savings plan (HSA) while you work, to build up a nestegg of funds that can be used to meet some of your medical expenses in retirement.

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Do I have a contingency plan?

Even though you are retired, unexpected events, emergencies and catastrophes still happen.

Discuss possible problems with your spouse, children and relatives so that everyone has an idea of what to do in health crisis or emergency.

An emergency fund will help mitigate any financial emergencies.

Make sure your estate planning documents are up to date.

Have a plan for a long-term illness, accident or untimely death.

Make sure your children are not dependent on you.

None of us can perfectly predict the future. There is some inherent risk in all we do, even on deciding to begin retirement. In retirement it is not as easy to recover from unexpected financial challenges, since we don’t have the time or employment income to rebuild following a crisis.

Prior to deciding if you are ready to retire, develop a contingency plan of the most likely bad events that may happen: your car dies, large repair expense for the home, medical emergency, or a death in the family to name a few. Discuss with your spouse and significant family members and close friends how you will respond to such events. Make sure that your estate documents are up to date, including wills, powers of attorney and trust documents. These are the legal documents that will carry out your wishes if you should become incapacitated or die prematurely.

Although a core component of sound finances prior to retirement, a fully funded emergency fund is also prudent in retirement. Emergencies still happen, even in retirement. A readily accessible supply of cash in an emergency fund will help you weather unexpected storms without derailing your retirement.

An increasing trend in the U. S. is that adult children are moving back home with their baby-boomer parents. If this is your situation, make sure you have that hard conversation with your children about your expectations and your retirement plans. Come up with a plan to get your children financial healthy and not reliant on you in your retirement years. The younger generation has more time to prepare for retirement than you do.

Even if your adult children are not financially dependent upon you, it is still important to discuss your financial and retirement expectations and plans with them. Involve them in the conversation, even the difficult and awkward parts. It is much easier to discuss these topics prior to a crisis, when emotions are calmer and decisions don’t have to be made quickly. Make sure your loved ones are aware of your wishes and that they know the location of important documents.

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Do I have something to do in retirement?

How will you spend your time?

Do you have a “retirement frame of mind”?

Find a purpose for your retirement: Even though you are retired, set goals, identify activities, and continue to engage with your community, friends, and family.

Make sure you discuss with your spouse your retirement plans and ensure that he or she is on board before you decide to submit your retirement papers.

Probably the most important question in deciding if you are ready to retire is determining what you will do in retirement? Up to know, you have had a purpose and a mission by being fully employed. Through work you had meaningful activities each day and a social network of people to interact and rely upon. Once you retire, your office environment will go away. What will you do with your time? Who will you interact with?

As you approach retirement it is important that you continue to set goals, perhaps develop a “bucket list”. These goals may not be as stringent as they were while you were working full-time, but it is important to set a framework for how you will proceed in retirement.

Perhaps you will become more involved with the community, social and charitable organizations that you feel strongly about. Perhaps you will take on new hobbies and recreational activities. Many retirees travel more, if so, but make sure you budget includes the expense of travel.

Be sure to discuss these issues with your spouse and significant people in your life so that they understand your expectations in retirement, and that you hear what their expectations are as well.

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Conclusions

With proper planning and preparation you can be confident when it is time to start retirement.

Seek professional advice. This is a big decision.

If the numbers don’t work yet, consider working a little longer.

Another alternative is a “gradual” transition into retirement - reducing your work load or shifting to part time work.

Have a plan for how you will spend your time in retirement. Time will be your greatest asset.

With proper planning and preparation, the determination of whether you are ready to retire or not can me made confidently. As we discussed, there are five key questions that must be addressed prior to submitting your retirement papers.

Don’t got it alone. Seek professional advice. Retirement is the biggest purchase you will make in your lifetime, so it is worth seeking the opinions and advice of others prior to making this big decision. If the financial numbers don’t work out quite yet, consider working a few more years or transitioning into retirement through part time or consulting work.

Be sure to have a plan for what you will do in retirement, time and health are your greatest assets.

The Relationship Managers at AAFMAA Wealth Management and Trust are here to help you with that transition. We can look at your portfolio and see if it matches with your retirement objectives. We offer a free portfolio review for all military veterans and retirees. A “second look” will give you a fresh perspective and may help you better make the decision to retire on time.