When can I retire has literally become a million-dollar question that many will ask themselves at one time or another. Like any financial goal, the key to successful retirement is thoughtful planning and preparation. After all, no one wants to have to retire twice. I have heard so many dreadful stories of individuals who failed to appropriately plan for retirement. Within two to five years, these individuals find themselves returning to the workforce. What a travesty!
The first thing an individual should consider when contemplating retirement is to assess how much money will be needed to finance their retirement years. As a rule of thumb, an individual will typically need to replace 70% - 80% of their annual pre-retirement income. Thus, if an individual earns $100,000 per year, that individual will need approximately $70,000 - $80,000 per year during retirement to maintain a comparable lifestyle.
The typical retirement age ranges from 55 to 65. The average life expectancy is 78 years. That means an individual retiring at age 59 will need almost 20 years of living expenses accumulated at the age of retirement, maybe more. This can be daunting for anyone considering over 50 million American households have absolutely nothing saved for retirement. Do not fret. There is still hope for a successful retirement. It is never too late to plan.
The best way to retire would be to be debt-free, including your mortgage. If you plan to retire within the next five to nine years, maximize your retirement savings by contributing the maximum amount allowable by the Internal Revenue Service. Next, you want to tackle all of your debt. Implement an aggressive debt extinguishment campaign which will, at a minimum, allow you to burn your mortgage and retire your student loan debt, if any. By the time you retire, you should have nine to 12 times your annual income in retirement savings.
You want to consider the cost of healthcare during your retirement years, in addition to your total living expenses. Medicare will not cover all of your healthcare expenses. Be realistic in your annual estimate of living expenses and your projections for healthcare coverage. You may also want to consider obtaining long term care insurance. Considering inflation, living expenses may actually increase during retirement years.
In addition to your living and healthcare expenses, you want to consider the cost of hobbies during your retirement. Playing golf and traveling the world can become expensive. Prepare to volunteer your time, as well, in meaningful causes and efforts.
Also, in retirement years, you should consider that you will be more susceptible to market declines and downward market trends. Be prepared to review your retirement portfolio on a quarterly and/or annual basis. Consider engaging the services of a professional financial advisor or certified financial planner so that you can protect the nest egg that you have accumulated.
You should also consider the tax implications of your retirement. Depending upon your income attributes, a portion or all of your social security benefits may be taxable. In addition, annual distributions from your retirement plan will also be taxable. Consider engaging the services of a Certified Public Accountant (“CPA) to assist you with effective tax planning.
Lastly, plan to enjoy your retirement. These will be your golden years. Know that you have paid your dues. Sit back, relax, enjoy, and let your dues pay you!
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Nicole Michelle
Finance and Money Wiz
July 5, 2024
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