As the decision to retire approaches, you’ll find the choice of when to retire is rarely black and white. Retirement- as you define it- is a personal blend of lifestyle expectations, health and financial stability. According to the US Department of Labor, fewer than half of Americans have an estimate of how much they need with their retirement savings. That’s a scary fact considering the average American will spend 20 years or more in retirement. The US Department of Labor also estimates 30% of private industry workers who have access to a defined contribution plan (such as a 401(k) company plan) don’t participate. But, you can be better than that. Asking the right questions about retirement will help you gauge your preparedness to know when you’ll be ready for retirement living.
Approaching retirement in good health may help you budget your retirement savings for health and medical expenses. But, retiring early means you’re not eligible for Medicare until age 65. Today there are few companies that pay for retiree health insurance coverage. Will you pay for health insurance out of pocket, or will you seek out alternate employment to obtain health benefits from a new employer? If you retire before your full retirement age but earn employment income, the Social Security Administration will deduct $1 for every $2 you earn above the 2014 limit of $15,480. However, it may be worth your while to work simply for the healthcare benefits. Maintaining good health through diet, exercise and the management of chronic health issues is the foundation of a proper retirement strategy.
Financial fitness is just as important as personal fitness. Your financial retirement plan should start with a sound budget that balances your fixed retirement income with the ability to meet planned – and unplanned – expenses during retirement. Identify all sources of retirement income, including withdrawals from retirement accounts, Social Security, defined benefit pensions and any supplemental employment income. Understand your choices for when to draw Social Security and pension benefits; tapping into those sources early often means a decrease in the overall value of your payments. Assess your housing situation as well; decide if owning or renting is a better fit for your retirement budget and your lifestyle. To avoid a housing burden, aim to keep housing costs below 25-30% of your income.
A study by the National Bureau of Economic Research raised the issue of adequacy regarding retirement savings. In other words…how much is enough when saving for retirement? The study reported 46.1% of people die with less than $10,000 to their name. Adequate financial preparation depends on many variables. The average retiree will spend several decades in retirement as life expectancies currently average between ages 83 to 85. What is your life expectancy, given your current state of health? Can your retirement savings plan support that span of time, and is it structured to provide coverage for unanticipated health expenses and end-of-life costs? A close finish – with less than $10,000 in assets – might be far too risky for those who do not want to place a financial burden on family members…or for those who want to leave a financial legacy upon passing.
Retirement isn’t only about leisurely days and vacations. When you part ways with the working identity you knew for 40 or more years, you may not recognize your new personality in retirement. Traveling may only fill a portion of your time; filling the rest of your days can be somewhat challenging. Even after completing routine household chores and spending hours on a hobby (or hobbies), many retirees still have more time available than they accounted for. This lack of engagement can take a toll both mentally and emotionally. Before you retire, develop a plan to introduce new activities, interests and relationships to stay fully involved with the world around you.
The answer to Can I Retire? comes when you take the time to define retirement living on your own terms.
Dr. Daniel Crosby, PhD, is President at IncBlot Behavioral Finance.
2017-41014 Exp. 5/19
United States Department of Labor, Top 10 Ways to Prepare for Retirement, Web. Dol.gov. As of June 2014.
National Bureau of Economic Research, Were They Prepared for Retirement?, Financial Status at Advanced Ages in the HRS and AHEAD Cohorts. NBER Working Paper 17824 February 2012.
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