Published February 05, 2013
You may have images of spending your retirement days lounging on the beach, at the local golf course or traveling the world. While these dreams don’t come cheap, they can become a reality with proper budgeting.
“Retiring isn’t the hard part, staying retired is,” says Scott Halliwell, certified financial planner at USAA, adding that retiring successfully comes down to having a plan.
The idea of leaving your 9-5 in the past is luring to any graying worker, but to know if retirement is a viable option, experts suggest asking these questions.
What do you plan to do in retirement?
Retirement has an emotional side and isn’t a requirement. “There have been people who quit working because that’s what they think they should do,” says Halliwell. Many retirees have a hard time transitioning into retirement, so saving for your nest egg is just as important as planning.
David Bendix, a certified public accountant in New York, suggests preparing psychologically for retirement, especially if your spouse is younger and still wants to work. People have more longevity today, and this is the time to do the things you’ve always wanted to do, says Bendix. “People who are busy and productive tend to be happier and healthier.”
Is it a good time to quit the workforce?
Experts suggest waiting to retire if your finances aren’t in order. “The gauge is do you have enough money to sustain your standard of living without withdrawing [more than] 4% of your retirement portfolio,” says Halliwell. Figuring out how you want to live and what that lifestyle costs is imperative to knowing if you’re financially ready to retire.
Start by reviewing your monthly expenses and whether your resources can cover these. Jonathan Clements, director of Financial Education for Citibank, suggests delaying retirement until you’re debt free and without any mortgages, auto loans, credit cards or other consumer debt to help lower expenses.
Since life expectancy is 78.7, according to the Centers for Disease Control and Prevention, project your finances through age 100 since you may live much longer if you’re in good health, says Bendix. “If someone’s looking over 30 to 40 years, there’s a big difference how long your assets will last.”
As you create a cash flow of expenses and income, he suggests increasing your expenses by 3% annually to account for inflation. “In 20 years, your needs will double and you have to factor this into your projection,” says Bendix. If the numbers don’t work, experts suggest changing your lifestyle, which may mean downsizing or selling a vacation home, to free up assets and lower expenses, or continuing to work so you have more time to prepare.
“Some companies have a phase in where you can get part of your pension and come back to the company as a consultant and work 20 hours per week,” says Bendix. Since there’s a high likelihood that you or your spouse will live to your 90s, a part-time or phased in retirement could give you peace of mind and the extra time to plan where and how you want to live when you’re in full retirement.
Do you have enough money saved for your expenses?
“It’s great if you have a lot of money but you need to turn that into an income stream,” says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial. You want a guaranteed income in the form of annuities, pensions and Social Security to cover basic expenses, like housing, medical expenses, utilities and food.
If your pension and Social Security isn’t enough, Halliwell advises against withdrawing more than 4% each year from your retirement portfolio to cover expenses. “You can buy an annuity to cover that difference but it costs more to get that payment because rates are so low,” says Halliwell. Even though annuities are expensive right now, they allow you to lock in that payment for the rest of your life.
One option is to delay collecting Social Security benefits since if you wait until you’re 70, your benefit can be up to 70% higher than if you claim at 62. “By delaying until age 70, you can set yourself up for a healthy stream of income,” says Clements. Unless there’s a compelling reason to claim benefits early (like you’re in bad health), experts advise continuing to work or using a portion of savings to cover expenses so you can claim this benefit later, especially if you’ve the longevity to live into your 80s or 90s.
Every retirement budget should have the flexibility to cover unexpected events, like replacing a car or extended long-term care needs, says de Baca.
Do you have health insurance?
Many retirees do not adequately budget for health-care costs. If you don’t qualify for Medicare, Bendix suggests considering how you’ll get health insurance, whether through COBRA from your former employer or a third-party provider. “If COBRA expires, for a husband and wife, [health insurance] could cost $1,500 per month or more, which is significant.”
“From a health-care perspective, hopefully you’re retiring when you have Medicare, which is age 65,” says Halliwell. Along with Medicare, purchasing a supplemental policy, which can cost a few hundred dollars per month per person, can help cover additional expenses.
Even with Medicare and supplemental policies, estimates range between $250,000 and $350,000 as the total dollar amount a couple would need to cover health care in retirement, says Halliwell. This dollar amount comes off the top of your retirement savings. “You have to someway account for the fact that you could spend a considerable amount of your portfolio on health care costs,” says Halliwell.
What to do when you’d like to retire but can’t afford to?
“Think about staying in the workplace longer—delaying retirement is one of the least used and most powerful tools,” says Clements. Working gives you more time to save and earn additional investment income on your savings. With an income, you can delay making withdrawals from your savings and delay claiming Social Security benefits.