Read This Before You Retire

By Maurie Backman Markets Fool.com

You've worked hard all your life, and now you're finally gearing up to leave the workforce for good. There are plenty of good reasons to look forward to retirement, but before you make it official, consider these three very important points.

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1. You can't bank on Social Security alone

Though Social Security helps millions of retirees stay afloat financially, it was never to meant to cover seniors' living costs entirely. The Social Security Administration estimates that its benefits will replace about 40% of the average worker's pre-retirement income. Most of us, however, will need far more than that to keep up with our living costs once we stop working. Though there are always exceptions, the typical retiree should aim to have access to 70% to 80% of his or her previous income, and Social Security will probably only cover about half that amount.

That said, if you're strategic about when you claim Social Security, you might manage to increase your monthly benefits. Social Security benefits are based on your highest 35 years of earnings. Once you reach your full retirement age, as determined by the Social Security Administration based on your year of birth, you'll be entitled to collect your benefit in full. But if you delay your payments past your full retirement age, you'll get an 8% increase for each year you hold off up until age 70, at which point the incentive to wait expires. (On the flip side, you can also start taking benefits as early as age 62, but doing so will reduce your payments permanently.) So if your full retirement age is 67 and your full benefit amount is $1,600, waiting until 70 would increase your monthly payments to $1,984.

Now one thing to keep in mind about Social Security is that the system is designed to essentially pay you the same lifetime amount regardless of when you first claim your benefits. In our example, waiting until age 70 may result in a 24% benefits increase, but it also means losing out on 36 months of benefits. To see whether it pays to claim your benefits on time, late, or even early, you'll need to figure out your breakeven age. If you expect to live past that point, then holding off on benefits could work out in your favor. Either way, make sure you save independently so that Social Security isn't your only source of retirement income. Even with a long-term benefits boost, you'll still need some of your own money to keep up with your expenses.

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2. You'll probably spend more than you think

The reason most people only need 70% to 80% of their previous income once they stop working is that certain expenses are likely to go down in retirement. Take commuting, for example -- if you don't have a job to go to, you won't spend any money to get there. Furthermore, many seniors manage to enter retirement mortgage-free, which is one less major expense to deal with.

But while your living costs might go down in certain regards once you retire, other expenses might throw you for a loop. Take healthcare, for example, which is a tremendous burden for retirees. The average healthy 65-year-old couple that retired last year is expected to spend a whopping $377,000 on healthcare in retirement, and that number doesn't even include long-term care expenditures.

Then there's housing, which can also eat up a huge chunk of the average retiree's income. Even if you own your home outright by the time you retire, you still have to account for property taxes, which have historically been proven to rise over time, even during periods when home values decline. There's also maintenance to worry about. The average homeowner spends anywhere from 1% to 4% of his or her property's value on standard upkeep and repairs. If your home is on the older side and worth $300,000, that means you could wind up spending $1,000 a month on maintenance alone.

Finally, there's entertainment to consider. Once you retire, you'll have more free time on your hands than ever before, and while you might snag some sizable senior discounts, you can't assume that all or most of your leisure activities will be free.

All of this underscores the importance of saving adequately on your own. Before you retire, take a look at your savings and compare the income you'll have available to the amount you expect to spend. If the numbers don't match up, you may want to consider postponing retirement until you've had a chance to save some more.

3. There are benefits to working longer

According to the Social Security Administration, the average 65-year-old man today can expect to live until 84.3, while the average 65-year-old woman can expect to live to 86.6. These are just averages, however, and if you exceed them (which would be a good thing in theory), you'll risk running out of money if your nest egg isn't well-funded. On the other hand, if you decide to work a little longer, you'll not only give yourself a few extra years to pad your savings, but you'll shorten your retirement and stretch your existing savings even further.

Working even one extra year could change your retirement picture. Currently, workers aged 50 and older are allowed to contribute up to $24,000 per year to a 401(k). Max out your contributions one more year, and you'll have an additional $100 a month to play with over the course of a 20-year retirement.

Finally, numerous studies have shown that working longer can be good for your health, while retiring early could actually increase your chances of dying younger. Yikes! If work serves as a social outlet for you and you enjoy what you do, then it pays to keep at it a little bit longer, especially if your savings aren't where they need to be.

Retiring is one of the biggest decisions you'll make in your life, so before you permanently pack up your workspace, make sure you're ready financially. The last thing you want is to wind up cash-strapped at a time when you're at your most vulnerable.

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