About to Retire? Read This First

By Maurie Backman Markets Fool.com

If you're like most Americans approaching retirement, you've probably put in your time in the workforce and feel ready to move on to the next chapter of your life. But before you make your retirement official, there's something you ought to know: No matter your financial circumstances, there's a good chance you'll need more savings than you think. And if you don't take steps to increase your savings while you still can, you may be in for some financial trouble down the line. Here are three reasons why.

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1. You can't just bank on Social Security

If you think your Social Security benefits will be enough to sustain you in retirement, here's a bit of bad news: Social Security is only designed to replace about 40% of the average worker's pre-retirement income. This isn't just a random estimate; the Social Security Administration itself explicitly states that the benefits it pays aren't enough to fully cover most seniors' expenses once they stop working.

Most Americans need at least 70% of their previous income in retirement, and if you're hoping to travel or pursue a similarly expensive hobby, then you'll probably need even more. That's why every future retiree should save independently, rather than counting on Social Security alone.

2. Your healthcare costs could skyrocket

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We all know that healthcare can be a major financial burden for seniors, but you could wind up facing even higher costs than expected. In fact, new data from HealthView Services, a provider of healthcare cost-projection software, tells us that the average healthy 65-year-old couple retiring this year can expect to spend a total of $377,000 on medical expenses throughout retirement. And that's just for a healthy couple. If you have a medical condition or suffer from generally poor health going into retirement, then you can expect that number to climb.

Furthermore, these projections don't take into account expenses like nursing-home care, which could cause your costs to double or triple. If these figures sound scary, it's because they are, so you'll need as much savings as possible to combat the expenses you're likely to face. If you don't feel prepared to manage the costs of managing your own health, then you may want to consider postponing retirement until you're in a more financially secure spot.

3. You might outlive your savings

There's a reason 60% of older Americans are more worried about running out of savings in retirement than dying: A frightening number of near-retirees are grossly behind on savings. An estimated 30% of workers 55 and over have no retirement savings at all. Of those who have begun saving, more than 25% report that their balances are less than $50,000, which is better than nothing but nowhere near where the average older worker should be. Throw in the fact that Americans are living longer these days, and it's no wonder so many share this legitimate concern.

The Social Security Administration estimates that the average 65-year-old man today can expect to live until 84.3 years, while the average 65-year-old woman can expect to live to 86.6. But these are just averages, which means you can't discount the possibility of living longer.

Before you retire, you'll need to take an honest look at your finances to see if you're really in a position to stop working. While there's no magic savings number to aim for, you can see whether you're on track financially by plugging your savings into the 4% rule.

The 4% rule states that if you begin by withdrawing 4% of your savings during your first year of retirement and adjust subsequent withdrawals for inflation each year, then your savings should last for 30 years. It's a formula that has historically been proven successful, and you can use it to see if your savings are adequate going into retirement.

To do so, start by estimating your living expenses in retirement minus your anticipated Social Security benefits. Next, multiply that amount by 25. As an example, if you'll require $24,000 a year in income outside of Social Security to cover your expenses, that means you'll need a total of $600,000 in savings to be financially prepared for retirement. If your current savings fall short, then you may want to consider postponing retirement and catching up. Currently, anyone 50 or older can contribute up to $24,000 a year to a 401(k) and $6,500 a year to an IRA. Working just a couple of extra years and saving the maximum could make a huge difference in the grand scheme of your retirement.

Before you leave your job for good, make sure you're financially ready for what lies ahead. The more money you sock away before you retire, the more choices you'll have once your working days are behind you.

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