Choosing to permanently leave the workforce can be both an exciting and nervous time. Chances are, you have been working full time for 30 or 40+ years and are used to receiving a steady paycheck. And now that you are considering retirement, how do you know if you’re financially ready?
Before you decide to call it quits to enjoy the “everyday is Saturday” lifestyle, you should consider the following questions:
How much income do you need to cover living expenses and healthcare costs in retirement?
Do you have a good idea of how much you spend each month and/or year? If not, now is the time to review your expenses and determine a realistic retirement budget. This is one of the most important factors to determine whether you will be able to comfortably retire and maintain your current standard of living. A good starting point is to review recent bank or credit card statements. Any expenses that relate directly to your current employment can be taken out, such as dry cleaning or commuting costs, but be sure to add in a buffer for unplanned expenses, such as home and auto maintenance.
What is going to replace your paycheck?
Social security, income from investments, pensions, annuities and/or part-time employment can all help to provide you with income in retirement. Be sure that your projected income from these sources, net of federal and state taxes, is enough to cover your living and health care expenses identified above. Depending on what age you retire, there are a number of financial planning opportunities to consider. For example, Social Security benefits may be available to you at age 62, although this may not be the best option for you to begin collecting benefits due to the permanent reduction in monthly income. You can collect at any age between 62 and 70, and there are pros and cons to starting at each of these various times. Similar options may be available if you are eligible for a pension or have an annuity.
Will you have sufficient health insurance coverage?
If you’re going to retire at age 65 or older, this question is a little easier to answer. You will likely be eligible for Medicare and will need to choose a supplemental plan unless you have retiree coverage through your employer. And if you’re retiring before age 65, there are a few options to consider.
First, determine the cost of continuing your employer-provided health insurance (if applicable) through COBRA. Once you leave employment, you should be eligible to continue your coverage as long as you pay 100% of the plan’s full costs, plus a 2% administrative fee. The plan’s full cost includes both your contribution plus your employer’s contribution, so it is usually higher than what you were paying while employed.
COBRA coverage is available for up to 18 months after your retirement date. If during those 18 months you become eligible for Medicare, your spouse and/or covered dependents are eligible to continue coverage for up to 36 months.
If you’re retiring more than 18 months out from your 65th birthday, or if your COBRA cost is high, you should review options for getting coverage on the federal health care exchange (https://www.healthcare.gov/). Depending on your income in retirement, you may be eligible for premium tax credits that will reduce the cost of your monthly premiums. And if your income is low enough, you may also be eligible for subsidies that reduce your out-of-pocket costs.
What will you do with your free time?
Some people are so focused on getting out of the daily grind they don’t stop to think about what would be filling their time if they didn’t go to work. While there may be a long “to-do” list for things you have been putting off, consider what your ideal routine looks like before you put in your notice. Whether it’s volunteering, spending more time with family, travelling, or anything else you’re passionate about, it is helpful to have some ideas when transitioning to your new lifestyle.
You may also need to replace social relationships that you had through your workplace. Joining a group of friends who have already taken the retirement plunge or volunteering with others can be a great way to maintain social connections in your next phase of life.
While there are many other factors that should be considered, these four questions should help determine if you’re ready to move forward with your retirement decision. And if you would like assistance evaluating, planning, and monitoring your retirement and financial situation, reach out to schedule a meeting with one of our financial advisors.
 Or age 60 if you are widowed.