You may be shouting to the rooftops to your friends and family that you’re ready to retire, but your finances may be telling a different story.
Before you plan a retirement party, take a look at our retirement planning checklist to see if your finances are in order. Here are some things you can ideally check off your list or help you assess where you stand.
Enough Savings to Retire
The amount of money you need to retire depends on many factors.
Dennis O’Keefe, who owns a financial planning firm, Successful Money Strategies Inc., in Fall River, Massachusetts, says it’s important to consider family history.
“If I have a client who is 58 and their mom is 88, we need to plan for a much longer retirement,” he says. That said, he acknowledges that if a client has a family history of not living so long, he still suggests planning for a long retirement.
“In either case, health history is very important to calculating how long someone’s money will last or how much they can safely withdraw per year,” O’Keefe says. “There is no magic number. Each person is different.”
Still, if you want a number, global investment firm T. Rowe Price suggests that at age 65, the average person should have saved seven to 13.5 times their annual salary.
The numbers are less daunting for younger ages. By age 30, for instance, T. Rowe Price suggests that you have half of your annual salary saved. In other words, keep saving, and over time, it shouldn’t be hard to have seven to 13.5 times your annual salary saved — in theory. In practice, as anyone will tell you, it’s not so easy.
Another consideration is the 4% rule, says Will Gogolak, an assistant teaching professor who specializes in finance at Carnegie Mellon University in Pittsburgh.
“The strategy suggests withdrawing 4% of your savings in each year of retirement, and after adjusting for inflation, the funds will last over a 30-year time horizon,” Gogolak says. “Its historical success emphasizes this strategy’s reliability.”
Using the 4% rule, if you had $100,000 saved for your retirement, you’d only be able to withdraw $4,000 a year. If you managed to save $1 million, you could withdraw $40,000 a year.
A Paid-Off House
If you can pay off your house before retirement, “living off $40,000 a year becomes even more viable,” Gogolak says, adding that it’s especially more viable if you’re residing in a city or town with a low cost of living.
Still, if you plan to use the 4% rule, you can start to see why having $1.5 or $2 million saved would be an even better goal, and, yes, they are daunting numbers for anyone who isn’t close to that amount in savings.
Health Care Coverage
Individuals tend to underestimate the potential health care expenses that may emerge during their later years, Gogolak says.
“It’s a common misconception, especially among those in their 50s who often feel invulnerable to health-related challenges,” Gogolak says. “Therefore, prior to making any decisive moves based on guidance, it’s prudent to assess its suitability with your unique situation and consider seeking advice from your own financial advisor.”
Of course, if you’re retiring when you’re 65 or older, you’ll be eligible for Medicare. If you’re retiring at a younger age, you should make sure you can afford to pay for a good health care plan on your own.
[READ: How Much Money to Have Saved for Retirement by Age 40]
A Budget for More Than Necessities
“Often when determining a retirement budget, people think of all of the necessities like food and shelter, which are obviously very important. However, they fail to include a budget item for enjoying themselves,” says Sara Zuckerman, a certified financial planner and the founder of Reset Financial Planning LLC in Scottsdale, Arizona.
“Whether it’s travel, golf or other items on the bucket list, most people have ideas about how they would like to spend time in retirement. However, when it comes to putting the expenses in the retirement calculator, these items are often left out,” Zuckerman says.
“People are so focused on getting a good score on the calculator that they fail to think about how they really want to live. It is important to make sure that you have enough, not just for the necessities, but to enjoy life as well,” she adds.
To make the most of your retirement, decide what interests you want to pursue and make sure you build the associated costs into your budget.
A Time Budget
It’s also wise to know how you plan to spend your time during retirement.
“Loneliness and boredom in retirement are real. Take the time to think about what you want retirement to look like for you,” says Angela Dorsey, a certified financial planner and the founder of Dorsey Wealth Management in Torrance, California. “Will you be retiring with a spouse? Do you want to work part time, volunteer or travel the world?”
Echoing a sentiment shared by many financial advisors, Dorsey adds: “It’s important to know what you are retiring to, not just from.”
[How to Use the Rule of 55 to Take Early 401(k) Withdrawals]
A Plan for the Worst
Retirement should be a wonderful chapter of your life, but you’ll want to plan for unexpected emergencies. Here are three more tasks to add to the checklist.
— Review your estate plan. If you haven’t looked at your estate plan recently or you don’t have one, this is a good time to do that. You’ll want to meet with an estate attorney or pay for some estate planning software tools to help guide you. “You should have a will, trust, durable power of attorney and health care power of attorney,” Dorsey says.
— Review your life insurance needs. It’s unpleasant to think about, but life insurance is important to add to your checklist. “After you retire, your employer’s group life insurance policies will expire. Evaluate your life insurance needs, for example, if you have a mortgage and want to make sure your family is covered, or if you want to provide an inheritance when you die,” Dorsey says.
— Have an emergency fund — and a way to replenish it. Before you retire, you’ll want to have some money set aside for those unexpected and expensive purchases that can throw off your finances. Ideally, your budget will allow you to add to your emergency fund in case have to dip into it.
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A Checklist for Your Retirement Money originally appeared on usnews.com
Update 08/16/23: This story was previously published at an earlier date and has been updated with new information.
