Signs You Are Not Financially OK to Retire

Julia Kagan has written about personal finance for more than 25 years and for Investopedia since 2014. The former editor of Consumer Reports, she is an expert in credit and debt, retirement planning, home ownership, employment issues, and insurance. She is a graduate of Bryn Mawr College (A.B., history) and has an MFA in creative nonfiction from Bennington College.

How to retire

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            Struggling to Pay Current Bills

            As a general rule, retirees may need about 75% of their pre-retirement income to enjoy a comfortable retirement. That income typically comes from Social Security, pensions, 401(k)s, IRAs, and other savings. Will those sources give you enough income to meet your obligations and enjoy your free time?

            “Commuting costs and dry cleaning expenses will decrease, but entertainment and travel may increase,” says Marguerita Cheng, CFP ® , RICP ® , and chief executive officer of Blue Ocean Global Wealth in Gaithersburg, Md. In addition, “It’s important to take taxes and healthcare expenses into consideration,” she says.

            Your Social Security check may be taxable, depending on your overall income. Most pensions are taxable. Withdrawals from 401(k)s and traditional IRAs will also be taxed. And without a job, you will not have access to employer-provided health insurance at favorable group rates. If you are 65 or older, you can enroll in Medicare, but Medicare is not entirely free.

            High Level of Debt

            “Large amounts of debt will severely strain your savings once you retire,” says David Walters, a certified financial planner and portfolio manager with Palisades Hudson Financial Group’s Portland, Ore., office. “If you can, reduce or eliminate credit card payments and car loans. Depending on your situation, paying off your mortgage or downsizing may also help in the long run,” he says.

            Paying down debt before you retire might mean working more years than you’d prefer, but it will likely be worth it for the sense of ease that comes with not having all those monthly payments hanging over your head. Getting rid of debt, including your mortgage, also means getting rid of interest payments that can take a toll on your long-term finances.

            For any loan with an interest rate equal to or higher than what you’re likely to earn in the market—say, 6–8%—you’ll get the best return, and a guaranteed one at that, by paying off your debt. If it’s a choice between paying 3% in mortgage interest (which may be tax-deductible if you itemize) and saving more for retirement, the latter is probably the smarter option, unless you have a poor investing track record.

            Stay on Top of Estate Planning

            Estate planning is another key step in a well-rounded retirement plan, and each aspect requires the expertise of different professionals, such as lawyers and accountants, in that specific field. Life insurance is also an important part of an estate plan and the retirement planning process. Having both a proper estate plan and life insurance coverage ensures that your assets are distributed in a manner of your choosing and that your loved ones will not experience financial hardship following your death. A carefully outlined plan also aids in avoiding an expensive and often lengthy probate process.

            A common retirement plan investment approach is based on producing returns that meet yearly inflation-adjusted living expenses while preserving the value of the portfolio. The portfolio is then transferred to the beneficiaries of the deceased. You should consult a tax advisor to determine the correct plan for the individual.

            “Estate planning will vary over an investor’s lifetime,” says Mark T. Hebner, founder and president of Index Fund Advisors Inc. in Irvine, Calif., and author of Index Funds: The 12-Step Recovery Program for Active Investors. “Early on, matters such as powers of attorney and wills are necessary. Once you start a family, a trust may be something that becomes an important component of your financial plan.

            “Later on in life, how you would like your money disbursed will be of the utmost importance in terms of cost and taxes,” Hebner adds. “Working with a fee-only estate planning attorney can assist in preparing and maintaining this aspect of your overall financial plan.”

            $11.7 million

            What is Risk Tolerance?

            Age 65 is typically considered early retirement. When it comes to Social Security, you can start collecting retirement benefits as early as age 62. But you won’t receive full benefits as you would if you wait to collect them at full retirement age instead.

            The burden of retirement planning is falling on individuals now more than ever. Few employees can count on an employer-provided defined-benefit pension, especially in the private sector. The switch to defined-contribution plans, such as 401(k)s, also means that managing the investments becomes your responsibility, not your employer’s.

            One of the most challenging aspects of creating a comprehensive retirement plan is striking a balance between realistic return expectations and a desired standard of living. The best solution is to focus on creating a flexible portfolio that can be updated regularly to reflect changing market conditions and retirement objectives.

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