I’m a Retirement Planner: 5 Things You Must Understand Before Retiring
Retirement is an eagerly anticipated milestone for many.
You might be picturing leisurely days filled with hobbies, travel, and quality time. But it’s a big transition to go from the structure of work life to retirement. It can be more complex than it appears at first glance. You need to approach this new chapter of your life with careful planning.
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Before you take the plunge into retirement, there are several key factors you need to understand and prepare for. Being well-informed and ready for what lies ahead can make the difference between a stressful retirement and one that lets you enjoy your golden years.
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You’ll No Longer Get a Paycheck
The shift from earning an income to living off your savings and investments can be not just a financial challenge but also a mental one.
“Sounds simple and obvious, but you will no longer get a paycheck,” said Elliot Herman, director at Edelman Financial Engines. “You are going to need to rely on a combination of savings, company/government pension (if available), and social security. Create an expense budget before retirement to see if the total projected income will support your lifestyle and include an inflation factor for both income and expenses.”
List all your expected expenses, including essentials like housing, food and healthcare, along with spending for travel, hobbies and entertainment. Assess your sources of retirement income. Determine how much you’ll need to withdraw from your monthly savings to supplement your fixed income sources and maintain your lifestyle.
When You’ll Take Social Security
Deciding when to start claiming Social Security benefits is a big decision. You can begin receiving benefits as early as age 62, but if you wait until your full retirement age results in higher monthly payments.
“Plan for when you might take social security, understanding the nuances specific to your situation,” Herman said. “A meeting with the Social Security Office is advisable to understand your options.”
If you claim Social Security at 62, your benefits will be permanently reduced by up to 30% compared to waiting until your full retirement age, which is between 66 and 67, depending on your birth year. On the other hand, delaying benefits past your full retirement age increases your monthly payment by 8% for each year you wait, up to age 70.
If you have enough other income or savings, you might afford to delay taking benefits and receive more later. But if you need the income sooner, it might be the right choice to take them sooner.
You’ll Need Health and Life Insurance
Healthcare costs are a major concern for retirees, so you’ll need to solidify your plans. Medicare becomes available at age 65, but won’t cover all medical expenses. You’ll need to budget for premiums, deductibles, copayments and supplemental coverage.
“Consider finding a Medicare expert to walk you through the options you will have in retirement,” Herman said.
Sign up for Medicare as soon as you’re eligible to avoid late enrollment penalties.
“Health issues of a large magnitude can negatively upset the applecart and best-laid plans,” Herman said. “Consider options to cover long-term care including hybrid and traditional long-term care policies. Visit a qualified professional to review the options.”
Having life insurance can give your loved ones financial protection. Consider whether term or permanent life insurance is more appropriate for your situation. Some retirees opt for policies that provide living benefits, like long-term care coverage, which can be valuable in later years.
“Is your life insurance from work portable?” Herman said. “Assess your need for insurance, your health and your ability to obtain more, and determine the best path forward to protect your family.”
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Review Your Investments
Check-in on your investment portfolio before you retire to ensure it meets your needs.
“Review your asset allocation and consider reducing portfolio risk for assets you will need to draw upon in the first five to ten years of retirement,” Herman said. “Understand the tax consequences associated with your accounts to devise a tax-efficient withdrawal strategy. Consult with a qualified financial planner for guidance.”
Don’t forget to review the fees associated with your investments. High fees can eat into your returns over time, so consider low-cost index funds or ETFs as part of your portfolio. If you’re not comfortable managing your investments on your own, then work with a fee-only financial advisor who can help you develop and maintain a good investment strategy for your retirement.
What You’ll Do with Your Time in Retirement
Planning your finances for retirement is important, but it’s just as important to think about how you’ll spend your time. The shift to unlimited free time can be challenging.
“Can you teach, volunteer, create, etc.?” Herman said. “Many people are living well into their 90s and finding purpose in those years is incredibly important. Are you able to consult your old firm or others?”
Make a list of activities you’ve always wanted to try or skills you’d like to develop. Volunteering for a cause you care about can give you both purpose and social connection.
Don’t underestimate how important it is to maintain those social connections in retirement. Plan regular activities with friends and family, join groups related to your interests, and consider taking classes at a local community college to meet like-minded individuals. Some retirees choose to start small businesses based on their hobbies or expertise.
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This article originally appeared on GOBankingRates.com: I’m a Retirement Planner: 5 Things You Must Understand Before Retiring