In 2022, the average retirement age in the United States was 64 years old, although this number has significantly increased over the last 20 years. In fact, the average retirement age was 59 years old in 2002, meaning that Americans are working about 5 extra years before retiring in today’s economy compared to the start of the millennium. Knowing when to retire can be tricky, as you may get different advice from your employer, the Social Security Benefits Administration, or even your financial advisor. Retiring too early can reduce the benefits you’re eligible for, leading to future financial troubles. On the other hand, retiring late means you have less time to enjoy not working.
If you’re nearing retirement and wondering if you’re ready, here’s a seven-step checklist to make sure you’re prepared.
1. Calculate your assets and liabilities
The first step in checking your retirement readiness is figuring out your current financial situation by adding up all of your assets and liabilities. To do this, make one list of every asset you own including cash, investments, real estate, vehicles, and anything else with value like an insurance policy. Next, create a list of all the liabilities you have such as debts, personal loans, and a mortgage. With both lists on hand, add up the values to estimate your net worth.
If you have a positive balance, you can proceed to the next step to estimate how far into retirement this money will take you. If you have more liabilities than assets, you’ll want to eliminate those as soon as possible to prevent interest from eating into your retirement funds. Many experts suggest repaying all debt prior to retirement, though you should talk with a financial advisor to get personalized guidance based on your situation.
2. Estimate retirement living expenses
After figuring out your current net worth, you should estimate your retirement living expenses to see how long that money will last.
According to data from the Bureau of Labor Statistics, the average retirement-age American household spends $4,345 each month, adding up to $52,140 per year. So if you have $500,000 in total assets, the value of those assets would only pay for 9 and a half years of retirement expenses at the current rate of spending. Of course, many retirees rely on social security benefits, pensions, and investment returns to supplement their monthly retirement income — so don’t panic if your assets don’t provide 20+ years of spending.
According to Fidelity, estimate your retirement expenses as 55-80% of your current annual spending. So if you’re spending $65,000 annually on living expenses before retirement, expect to spend between $35,750-$52,000 each year during retirement. Whether you aim for the 55% or 80% figure will depend on your current financial situation and lifestyle. You should estimate higher expenses if you retire with debt, have a health condition, or want to live extravagantly by traveling or spending more than usual. On the other hand, you can estimate lower retirement expenses if you plan on cutting spending by eating out less, traveling infrequently, or downsizing to a smaller home.
3. Check your social security benefits
The amount of money you receive depends on the age you retire. Americans are eligible to start receiving social security benefits at age 62, but delaying them until your full retirement age (defined by the Social Security Benefits Administration) will allow you to collect a larger amount each month.
According to the SSA, if you turn age 62 in 2023, you could start collecting social security benefits now and that amount would be capped at $2,572 per month. However, waiting until you reach age 67 (your full retirement age), would increase your maximum benefit to $3,627. If you can wait even longer until you’re age 70, you’d be eligible to collect up to $4,555 in benefits. Depending on how much you have in assets and your estimated retirement living expenses, it may be a good idea to delay taking social security benefits so you can collect a higher amount later in life. Alternatively, you could take the benefit that’s available now and invest the proceeds to start accumulating interest.
4. Figure out your healthcare plan
As you get older, expect healthcare expenses to increase. According to the Peter G. Peterson Foundation, here’s how annual healthcare spending looks for different age groups:
- Ages 0-18: $3,749
- Ages 19-44: $4,856
- Ages 45-64: $10,212
- Ages 65-84: $16,977
- Ages 85+: $32,903
For retirees, healthcare expenses may increase at the same time as you’re losing access to employer-sponsored healthcare coverage. Luckily, you can apply for Medicare at age 65 and rely on that to help pay for healthcare expenses as you get older.
However, if you plan on retiring before you’re eligible for Medicare — you’ll have to get health insurance through other means. If you have a spouse who plans to continue working, the most affordable option may be becoming a dependent on their plan. If that situation doesn’t apply, you’ll have to shop around for coverage which can be quite expensive. Do lots of research and make sure you understand what’s covered and how much it will cost for premiums, deductibles, co-pays, and other out-of-pocket expenses.
5. Create a withdrawal strategy
Even with recurring income sources like social security benefits and a pension, you may still need to dip into your savings and investments to cover retirement expenses. Doing so may incur taxes and you’ll lose money due to inflation, so it’s important to have a strategy that minimizes these losses. A financial advisor will help you determine how much you should withdraw each month and from which accounts (fees will differ depending on if it’s taxable, tax-deferred, or tax-exempt).
As a general rule of thumb, most experts recommend the 4% withdrawal rule. According to the rule, you should withdraw up to 4% of your retirement portfolio in your first year, then adjust that amount multiplied by inflation for each of the following years. The idea, is that adjusting your withdrawal by inflation will allow you to maintain the same purchasing power over time.
6. Set aside an emergency fund
Separate from your normal savings and investment portfolio, you should establish an emergency fund with enough money to cover at least six months of living expenses. The emergency fund will provide a financial safety net in the event of a catastrophe or issues accessing other revenue sources. Make sure this fund is a form of liquid asset such as a savings account, as you don’t want to rely on something like a home or investment because you may be forced to sell at a below market value in order to access the money quickly.
7. Plan your estate
Since planning for retirement involves adding up all your assets, this is also a good time to plan your estate. An estate plan features three components:
- Living will: details your medical preferences and designated power of attorney
- Trust: identifies the third party who will hold and distribute assets to beneficiaries
- Will: explains how you want your personal assets divided among beneficiaries
Although your assets and financial situation are likely to change over time, you can make as many adjustments as you’d like (as long as you’re of sound mind). Doing this at retirement is a good idea because without a notarized plan, your assets may go to the IRS instead of loved ones upon your death.
Related to your estate plan, is what should happen to your life insurance policy or the death benefit upon your passing. If you have a life insurance policy and plan to keep it in force through the remainder of your life, make sure to include this in your estate plan (even if the money is inaccessible now). If you don’t plan on maintaining coverage, consider selling your policy through a life settlement instead of surrendering it. Selling your policy provides a one-time cash payment that you can use while you’re still alive, which can help you fund retirement expenses. If you’re curious about the value of your policy, contact Harbor Life Settlements for a free estimate!
