When you retire, do you envision travel, dinners out and more time to pursue your hobbies? While you’re dreaming about what you’d like to do, have you considered the financial aspects of retiring? Will you have enough money to maintain your preferred lifestyle? What if you get sick and incur extensive health care costs?
Unfortunately, only half of Americans have calculated how much they need to save for retirement — leaving many people completely unprepared for this next chapter.
Before you retire, consider these 10 questions:
1. How much do you need to maintain your standard of living? This number depends your age, lifestyle, monthly expenses, outstanding debts and financial portfolio. Use a cash flow sheet to outline your monthly budget, including mortgage, property taxes, groceries, insurance, etc. Determine what you spend monthly on necessities as well as travel, entertainment, etc.
2. Can your assets support your lifestyle? Most people will need 70% to 90% of their income to maintain their lifestyle when they retire. But Social Security only replaces about 40% of the average salary, which means you’ll need additional guaranteed income sources to fund your retirement.
Create a financial plan and a budget to better understand what you can realistically afford to spend per month. The plan must be flexible enough to withstand any emergencies, like sicknesses, unexpected home repairs, etc.
3. What’s your guaranteed income? Since Social Security will replace less than half of your pre-retirement salary, solidify other guaranteed income streams, like a pension, rental properties, investment dividends or the sale of your business. Determine whether you’ll want (or need) to continue working to maintain your preferred lifestyle.
4. What’s your spouse’s guaranteed income?
Similarly, your partner should have guaranteed monthly income beyond Social Security payments.
5. Have you reviewed a financial model of your retirement years? Meticulously analyze your expenses using a worksheet. Determine what you spend on monthly expenses and figure out if your assets will generate income to fund these costs.
6. What are your family legacy objectives? The Great Wealth Transfer, expected to be the largest intergenerational wealth transfer in recent history, will occur over the next 20 years.
Boomers will pass along trillions of dollars to their children and grandchildren, making legacy planning essential. Review your financial plan to determine what’s realistic for you to pass along to the next generations. Also, since current estate tax planning rules will expire at the end of 2025, more people will need to pay federal estate taxes, and at higher amounts. Consider gifting strategies to transfer asset appreciation out of your estate, reduce estate taxes and give assets to your loved ones.
7. Do you plan to help your children? If you want to help your children (e.g., pay the down payment on a home for them), ensure that you have the assets to cover your own costs before you give it away. The 70% to 90% income threshold (mentioned above) often isn’t enough to spend on “extras” like this.
8. Do you have major expenses on the horizon? Have you promised to pay for a wedding or college tuition? Does your house need a new roof?
Include these anticipated expenses on your cash flow document.
9. How long will you stay in your house? Will you continue living in your home, or do you plan to move somewhere new in retirement? Will you downsize to a smaller place, move to a 55+ community or transition to an assisted living facility?
10.How will you pay for health care costs? Health care costs often increase in retirement, as older couples may spend as much as $184,000 to $383,000 for medical expenses alone, depending on their Medicare coverage. Maintain access to cash in case of emergencies, whether it’s in a bank, a reserve equity line or a life insurance policy.
Asking yourself these 10 questions is an essential part of retirement preparation. Work with a trusted financial advisor to ensure that you’re properly prepared to maintain your preferred lifestyle in retirement.
