March 14, 2012 |Jeanine Skowronski, MainStreet Staff Writer
NEW YORK (Mainstreet)– Pulling the trigger on retirement can be a costly mistake if your finances aren’t in good shape.
“It’s a very uncertain time for people,” says Doug Kinsey, a certified financial planner with Artifex Financial Group. Luckily, there are steps you can take to make yourself feel more secure as you approach retirement age. How can you tell if you’re ready to retire the way you imagined? Here’s a checklist of questions every pre-retiree should examine.
What kind of lifestyle do I want in retirement?
Several studies have tried to pinpoint how much money people should specifically have on hand before they retire. The truth is, though, that this amount is going to vary dramatically depending on what type of lifestyle you’re looking to lead once you’ve left the workforce.
“Your entire financial plan is going to stem from that vision,” says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial (AMP). She suggests considering where you see yourself living, whether you plan to get another job during retirement and how you plan on spending your time.
“Free time is very expensive,” agrees Diana Palmer, a certified public accountant with Family Financial Planning. “If you like to travel, your budget needs to be set much higher.”
Will my debts be paid off?
Unpaid debts will contribute to your monthly expenses and play a huge part in how much money you will need to have on hand before you go ahead and leave the workforce. This is not to say your house needs to be paid off in full before you retire.
“If you have a low interest rate [on your mortgage], you’ll have to ask, ‘Do I want to pay this off in full?'” Kinsey says. On the other hand, if the mortgage is more substantial, you may want to consider taking money out of your investment portfolio so you don’t have to worry about it moving forward. The point is, whichever option you chose will have a significant impact on your cash flow.
If you have other debts on the books, such as high credit card balances, you may want to look into what other factors may be behind the balances so you can get them paid off as much as possible before you abandon a steady paycheck.
How will I pay for health care?
All of the financial advisers we spoke with reiterated the importance of factoring in health insurance premiums and prescription drug costs when deciphering how much money you will need in retirement.
Additionally, under federal law, most Americans are not eligible for Medicare until they are 65 or older, so if you’re looking to retire before then you will need to determine where your health care coverage would be coming from and factor that plan’s cost into your overall budget.
You’ll also need to ask yourself how you plan to address your long-term care expenses, says Joe Alfonso, a certified financial planner with Aegis Financial Advisory.
“It’s not just about buying the insurance,” he says. “But you need to ask, ‘Do I plan on moving in with my children? Do I expect my spouse to be able to fulfill that need?'”
You can find out more about long-term care options here.
What sources of income will I have?
Of course, the second part of the equation involves looking at the sources of income you’ll have available upon retiring, Kinsey says. This can include Social Security benefits, which you are eligible to get — at least in part — at age 62. It could also include a pension you may have earned, paychecks produced from a potential second career or the revenue generated by your investment portfolio.
Do I want to leave money to my loved ones?
“People need to think about legacy planning,” de Baca says, explaining that those looking to leave money or assets to their next of kin end up writing a very different budget than someone who has no plan to do so.
As such, you may want to write out a will before formally leaving the workforce, since it could actually delay your retirement or affect the lifestyle you adopt after you do so.
How Much Cash Flow Do I Need for My Desired Lifestyle?
After you’ve considered your vision for retirement and calculated your expenses, you should come up with the ideal amount of money you would need coming in to support that lifestyle. Palmer says every prospective retiree should ask themselves this crucial question: If you were to retire today, what check would you like to see in your mailbox each month?
“Once we know that number, we work out if that lifestyle is plausible,” she says.
Will my assets cover this lifestyle?
After you’ve determined what your ideal retirement paycheck would be, you need to see if you will have enough money on hand to generate it.
“Depending on that answer, decisions have to be made,” Alfonso says. “If you don’t have enough money, there needs to be a tradeoff.”
This could include delaying retirement, spending less, downsizing your home, moving to another state or adjusting your lifestyle requirements.
“Saving more isn’t always the best option due to the time constraints,” Alfonso says.
Do I need to make changes to my investment portfolio?
As you near retirement, you may also want to make some adjustments to the investment portfolio you’re hoping will power it. This could involve switching to more conservative stock or bond options, but it doesn’t have to, Kinsey says.
“You need to ask yourself: ‘How conservative can I be and still reach my goals?'” he says. “This doesn’t mean you have to run to bonds. You can move to an asset-deduction model that makes sure you have enough [money] to cover the income gap and then invest for growth.”