Are You Financially Prepared to Retire?

Retirement means different things to different people. Some hope their retirement income will support years of travel and new experiences, while others simply want enough to live comfortably and spend more time with family.

Whatever your goals are, every retirement strategy has one thing in common: it takes careful preparation.

Here’s a look at how to tell whether you may be ready to leave work behind, along with the major factors to review before you submit your retirement paperwork.

Three questions to help you gauge retirement readiness

Before you start thinking about a goodbye celebration at the office, it helps to answer a few basic questions to see whether your finances line up with your retirement plans.

What will I spend in retirement?

When building a retirement budget, start by examining your current monthly spending. Some work-related costs, such as commuting or office attire, may drop, but other expenses may rise, including entertainment, doctor visits and home maintenance.

You should also think about how costs may shift over time. For instance, your housing expenses could fall if your mortgage is paid off before you retire. But housing costs could climb again if injury or reduced mobility requires renovations or a move to a home that is already more accessible.

What income will I have in retirement?

List every possible source of retirement income, including Social Security, pensions and withdrawals from 401(k) plans or individual retirement accounts (IRAs).

The amount you need will depend on your personal situation and the kind of retirement you want. An online retirement calculator can help you estimate whether you are on track or need to save more.

“Plans should be personal, but a good start is to ensure you have between 70% and 90% of your pre-retirement income when combined with Social Security,” says Lawrence Sprung, a certified financial planner and wealth advisor with Mitlin Financial. In practical terms, that means aiming for about $70,000 to $90,000 a year in retirement income if your pre-retirement salary is $100,000.

Another rule of thumb is to have savings equal to one to eight times your annual income, depending on age. For Americans ages 34 to 44, the suggested balance is three times annual income. Still, these are only guidelines. The right amount depends on your finances, your retirement goals and your expected spending.

The chart below compares recommended retirement savings for different age groups with actual savings levels, based on federal data:

How long might I live?

No one likes to dwell on mortality, but life expectancy matters when estimating how large your nest egg should be. The longer your retirement lasts, the more money you may need to maintain your desired lifestyle.

The average life expectancy in the U.S. is 79, according to the Centers for Disease Control and Prevention, though many people live well beyond that. Another useful tool is the Social Security Administration’s life expectancy calculator, which uses age and sex to estimate how many more years you may live. Depending on those factors, your estimate could be higher or lower than average.

These calculators do not account for every personal factor, such as family history, health and lifestyle, but they can still help you estimate an income target you are less likely to outlive.

Expenses retirees often overlook

Even people who are otherwise well prepared can be surprised by some of these retirement costs.

Taxes

Taxes are usually simpler while you are working and earning from a single job. After retirement, though, your income may come from several sources that are taxed differently. The amount you owe can also change from year to year depending on which accounts you draw from.

For example, withdrawals from 401(k) plans and traditional IRAs are taxed as ordinary income. Depending on the size of those withdrawals, you could move into a higher tax bracket than expected. Similar tax rules may apply to pension income and certain annuities.

Long-term care

There is a strong chance you may need some form of skilled care later in life. A 2019 study by the U.S. Department of Health and Human Services and the Urban Institute found that about 48% of people who live to age 65 or older receive some type of paid care during their lives.

Long-term care refers to assistance that helps with daily tasks such as eating, bathing, dressing and moving around the home. It can range from lower-cost support like meal delivery to more extensive services such as full-time care at home or in assisted living.

Medicare does not generally cover day-to-day assistance as you age. It usually pays only for short-term nursing care and physical rehabilitation when medically necessary, such as after a hospital stay. Because of that gap, you may need to set aside savings in advance.

Healthcare costs

Medical expenses are a major issue for retirees.

“Healthcare is by far the biggest unknown when it comes to retirement, especially those retiring before age 65 when Medicare will kick in,” Sprung says.

If you retire before 65, you may need private health insurance, which can be costly. Even after Medicare begins, you still have to budget for premiums, deductibles and other out-of-pocket expenses.

Inflation

Costs for essentials such as groceries, household goods and gasoline tend to rise over time, and inflation can be especially hard to manage on a fixed income if you have not planned for it.

“The biggest thing I see happen to early retirees is not sufficiently accounting for inflation in their expenses,” says Ronnie Colvin, a CFP and founder of Fractional Planning.

The Federal Reserve expects inflation to average 2.5% over the next 10 years. Retirement planners often build in annual cost-of-living increases of 2% to 4% to prepare for years when inflation runs higher. Social Security and some government pensions also include inflation adjustments through cost-of-living increases.

How a financial professional can help

A financial professional or wealth advisor can review your finances and help you build a retirement plan tailored to your needs. They can also advise you on saving, investing and managing money so your nest egg is ready when you leave the workforce.

Many Americans say they feel more secure after working with a financial planner, according to Wealth Watch, a survey of 2,262 people conducted by New York Life. About 31% of those who worked with a financial professional said they felt more prepared for retirement, compared with only 8% of those who did not.

Financial advisors vary in their licensing, services, compensation and standards. Before choosing one, ask about credentials, fees and whether they serve as a fiduciary, meaning they are required to act in your best financial interest.