Wouldn’t it be great if you could wave a magic wand and know that you’re financially ready for retirement? Though it’s not that kind of hocus pocus, my M-A-G-I-C formula can help you figure out when to retire. I’ll give you a hint: The formula centers on planning ahead.
Deciding When to Retire Isn't Magic
Many people wonder when the best time is to retire. After several years of speaking with pre-retirees and those who have already retired, some things have become clear to me:
There’s no magic age.
There’s no magic number.
There’s no magic way.
What matters is that the timing, the amount and the path to retirement fit you. The magic begins when you are confident in your plan. Below is my formula for deciding when you’re ready to retire.
See How Ready You Are for Retirement.
The M-A-G-I-C Behind Retirement Readiness
M is for Your Money Plan
First and foremost, you need a good understanding of how much money you will need in retirement. It’s not about getting to one magic amount. It’s about your amount and knowing whether you’ll have enough to cover your expenses.
In my experience, all great retirement plans start with a budget. A retirement budget will be necessary too, but you also need a budget for today’s expenses for a couple of reasons:
Budgeting helps you know what you’re spending and can help you find potential ways to free up money for more savings.
Today’s budget will help you plan better for retirement. Using your current budget makes it easier to adjust expenses up or down and consider new expenses in retirement
For your budget, pay attention to your debt. You don’t necessarily need to be debt free in retirement, but paying it down may help create peace of mind.
A is for Action
If you’re getting closer to retirement, it’s important to act now and create a plan—one that’s recorded and that you can revisit. A retirement plan is really an “income” plan because it sets out how you will replace your paycheck after you quit working. Some key components are below.
A retirement budget (see “M” above). The budget includes all income sources and estimated expenses, so it’s a great place to figure how much money you will have and need.
A Social Security strategy. Your Social Security benefits will likely be a main source of income. Timing is important and so is your situation. Planning will help you make an informed decision and possibly get the most out of your benefits.
A withdrawal strategy. This outlines which funds you will withdraw from in retirement and in what order, i.e. retirement accounts, taxable accounts, etc. Do your homework to figure out a strategy that considers things like how well funded you are and your tax situation. This is when a professional may be helpful.
An investment strategy. Even if you aren’t retired yet, consider when and how you may want to change your investment portfolio to suit retirement. You will likely want to protect what you have, but also keep your money growing so it lasts as long as you need it.
There are many things to consider for a retirement plan, so getting help from a financial consultant may be worth your effort.
G Is for Game Plan
One big regret retirees express is that they didn’t plan for what to “do” in retirement. Sometimes the preparations for leaving a job overshadow what you will do next.
The great news is that if you solidify your retirement goals early enough, the possibilities could be endless. Do you and spouse want to travel the the world? Spend half the year in a warmer climate? Take up golf or pottery? You’ll especially want to start early if your plans require a substantial amount of money. My biggest advice here—do what makes you happy.
A second part of your game plan should be about who you will spend your time with. Research shows that one in three seniors feel lonely. That could be for many reasons, but one might be that your job provided meaningful relationships that can be hard to maintain. Consider ways to stay connected with people or how you will make new connections. Will you volunteer? Move someplace with liked-minded people nearby? Join a book club or a walking group?
I Is for Insurance
The purpose of insurance is to pay for unexpected losses that you cannot cover yourself. This could include a surprise medical bill or homeowners’ insurance claim. Your planning should include understanding your retirement insurance needs. Explore your options for Medicare and long-term care as well as potential changes you may need to make for life insurance, mortgage or renter’s insurance and car insurance. Plan ahead to ensure you have the right coverage.
Three things to consider about health insurance in retirement are:
- Medicare won’t cover 100 percent of medical costs and a supplemental plan is usually required.
- Long-term care insurance (which covers assistance with daily activities like dressing or bathing if you cannot perform those activities yourself) is usually cheaper when you are younger and still healthy.
- Health Savings Accounts (HSAs), which are often combined with high-deductible health care insurance plans, can help you set aside funds for current and future health expenses.
In addition to insurance, have a plan for unexpected expenses. Just like emergency funds are necessary now, they may be even more important in retirement.
C is for Caring for Loved Ones
Part of being ready for retirement should include having an estate plan. It’s important at any age, but if you don’t already have one, I encourage you to take care of it now.
The last thing you want is to have your assets tied up in probate if something should happen to you. It’s especially important if you also have a partner who’s retired and counting on your assets—even more so if you want your partner to inherit certain assets but you aren’t legally married.
Make sure your estate plan covers advanced directives and medical directives, as well as your designated beneficiaries. This will make your wishes known and help reduce confusion and angst for your loved ones.
Learn More About When to Retire
It takes an idea of the timing, the amount and the plan to know when to retire.
Make Retirement Magical
As you can see, asking a simple question about when to retire does not have a simple answer. But it’s all doable and you can get help along the way.
Call us to learn more about preparing for retirement.
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This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.