It's pretty hard to un-retire, so before you take that final step, it's important to know exactly how you'll pay for said retirement. Knowing the answers to these basic financial questions ahead of time helps to guarantee that you won't run out of money while you still need it.
How much retirement income can you count on?
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Most retirees have at least two sources of income: their retirement savings accounts and their Social Security benefits. If you have additional sources of income, such as a pension or a side gig, so much the better. More income sources means a higher level of financial security.
Your Social Security statement will tell you how much you can expect to receive in Social Security benefits based on the age at which you claim your benefits. Figuring out your income from retirement savings is a bit trickier, but you can start by assuming you can withdraw at least 3.5% of the total balance each year. Just multiply the total balance in your retirement savings accounts by 0.035 to determine your minimum annual income after you retire (a savings calculator can help you estimate how much you'll have saved up by retirement). Add those two figures up along with any other sources of retirement income, and you'll know how much you'll have to live on after you retire.
When should you claim Social Security?
Choosing the age at which you claim Social Security benefits is one of the most important retirement decisions you'll make. Claim your benefits before your "full retirement age," and you'll get hit with a penalty that will permanently reduce those benefits. Wait until after full retirement age, and you'll get delayed-retirement credits that permanently increase your benefits instead. The soonest you can claim Social Security benefits is age 62, and delayed-retirement credits max out at age 70, so that's the typical window for claiming Social Security.
Figuring out the best age to claim Social Security can get complicated, but it boils down to deciding whether early or late claiming will get you the most money from the program throughout your lifetime. If you expect to live longer than average, then claiming Social Security late will result in a higher total, because you'll collect enough benefit checks to make up for all the ones you forwent before you filed. If you're in poor health or otherwise expect a shorter lifespan, then claiming your benefits early can be a significantly better deal for you. Your monthly checks will be smaller, but you'll collect many more than you would if you waited until full retirement age to file.
Of course, if you are forced to retire earlier than planned or otherwise need the money now, go ahead and claim your benefits, even if that means you won't maximize your lifetime benefits.
How will you manage your investments post-retirement?
During your working years, the goal for your retirement savings investments is accumulation. You want to make that money grow fast so that you'll have as much as possible by the time you retire. Once you actually retire and start living off that money, your goal will switch to preservation instead. You'll want to make that money last while still being able to draw an adequate flow of income from it.
This shift in investing goals means you'll have to make a shift in how you manage your investments. For most retirees, this means putting the bulk of their retirement money into a bond ladder; bonds are far less volatile than stocks, and they produce a predictable and steady source of income through their interest payments. However, it's important to keep some money in stocks so they can prop up your overall portfolio returns. A rough guide for most investors is to subtract your age from 110 and keep that percentage of your retirement investments in stocks, with the remainder in bonds.
Can you pay for healthcare and long-term care?
If you thought healthcare was expensive during your working years, wait until you retire. The average 65-year-old couple retiring in 2017 can expect to spend just over $404,000 on healthcare expenses during their retirement, according to a recent study by Healthview Services. That's more than many workers have in their entire retirement savings accounts. And because healthcare expenses are going up faster than overall inflation, don't expect your Social Security cost-of-living adjustments to keep up with those expenses.
Long-term care often becomes a huge percentage of a retiree's healthcare expenses, as most long-term care services are shockingly expensive (and typically aren't covered by Medicare). Thus, picking up a long-term care insurance policy before you retire can dramatically lower your healthcare expenses during retirement. Studying your options carefully before choosing your Medicare package can also help minimize medical expenses.
Getting the answers to these retirement finance questions will probably require some research and hard thinking on your part. But it's much better to do the work before you retire than after -- you can save yourself from a lot of expensive mistakes that way. Besides, you'll be able to enjoy your retirement that much more if you've done all your homework in advance.
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