Ready For Retirement? Answer These 6 Questions First

Spontaneity can take us out of our comfort zones and force us to look at the world in a different way. But sometimes being spontaneous can cause stress and anxiety especially for those of us (myself included) who like to have a plan, a direction, and a clear path forward. In retirement planning, I think there can be a little bit of both spontaneity and deliberate planning involved in your retirement lifestyle. One can provide adventure and freedom, while the other offers the security to get you there.

As retirement draws near, it is important to think about the many changes that come with it. In order to help ease the nerves that come along with such a change, I have put together a list of questions that will help you prepare for your new life in retirement.

1. How will you prepare for taxes?

Tax preparation is something everyone has to deal with, even retirees. Even though you may not be working anymore, you are still earning income from your retirement accounts and that income is subject to taxes.

But the way that income gets taxed is quite different from your working years. In order to get a clear picture of your tax situation you need to know how the following will be taxed:

  • Social Security This can range from 0-85% depending on the other sources of income you have. The IRS provides a tax worksheet to help you figure out how much of your benefits will be subject to tax.
  • Workplace plans and IRA All distributions from your 401k, 403b, and/or 457 plans will be taxed as regular income. Traditional IRAs will also have distributions taxed as income. The only account that has tax-free distributions is a Roth IRA.
  • Pension The amount of tax you will pay on your pension distributions depends on if the contributions you made were with pre-tax or after-tax dollars. Most are funded with pre-tax dollars meaning all distributions would be subject to income tax.

Once you understand how each of your accounts is taxed, you need to figure out your tax bracket to see the percentage you fall into. This is determined by your total income and your deductions.

2. When will you take Social Security?

For today’s retirees, Social Security amounts to about 40% of a person’s income. This is a huge percentage, therefore it is crucial to know the best time to enroll in benefits. In general, you have three options:

  • Early You can begin collecting benefits at 62, but the benefit will be reduced by about 30% over the course of your life.
  • Full Retirement Age For those born in 1960 and later that age is 67 and once you reach it, you will be able to collect 100% of your benefit.
  • Late If you wait to collect Social Security until you are 70 you will increase your overall benefit by about 25%.

Each of these options has its pros and cons and is an individual decision. Before you make your choice it is important to look at your health, income needs, and retirement lifestyle to decide which option makes the most sense for you and your family.

3. What type of health care coverage will you have?

Health care is one of the biggest expenses facing retirees today. On average a healthy couple will spend over $250,000 in medical expenses in retirement which will take a serious hit to your budget if you are not prepared for it.

If you are 65 or older you can enroll in Medicare, but it is a complex system that comes with many moving parts and options for coverage. Many people think it covers more than it does, so I advise that you really do your research to see exactly what it does and does not cover so there are no surprises.

4. Where will your income come from?

This question asks you to take a comprehensive look at your retirement accounts: IRAs, 401k, other investments, etc. to determine a withdrawal strategy. Most experts advise anywhere from a 3-5% withdrawal rate to ensure you will have enough money to last you all the way through retirement. But this is a difficult task to manage on your own and a financial advisor can help you take a comprehensive look at your investments to help you decide the right percentage for your portfolio and risk tolerance.

5. Do you have a budget?

All the talk about budgets does not stop once you retire. A retirement budget will help you keep your other living expenses in order. Now that you have an overarching understanding of your retirement income and the amount you wish to withdraw each month, you need to make a plan for that money. How much will go toward housing, food, entertainment, etc? Establishing a healthy budget rooted in your intentions and values will help you stay on track.

6. What type of lifestyle do you envision?

Lifestyle is one of the biggest pieces of the retirement puzzle. Creating the most fulfilling life for you in retirement takes planning, preparation, implementation, and flexibility. You will need to decide how you want to live and that includes where you will live and how you will spend your time. Planning your time in retirement is a huge component of making your retirement a happy one.

Retirement planning is a lot of work. There are many steps included in helping you reach the lifestyle you have always dreamed about from financial readiness to personal readiness.

I know it can be tough and overwhelming, especially planning out your finances, but I encourage you to have some fun with the process and never forget that retirement is an adventure and approaching it with honesty and freedom will help you get where you are going.

What’s the next step in your retirement planning?

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