According to the Social Security Administration (SSA), the full retirement age is 66 or 67, depending on the year you were born. However, you can start receiving benefits as early as age 62. And if you have other retirement savings at your disposal, you may even be able to retire far earlier.
Ultimately, retirement isn’t an age. Rather, it’s the state of being fully prepared to live the rest of your life without the income and benefits of a traditional nine-to-five job.
But how do you know if you’re really ready to retire? We’ve put together a handy checklist for workers who are nearing retirement. Here are nine steps to take now.
1. Calculate Your Retirement Savings Number
The first step towards knowing if you’re ready to retire is to have a clear understanding of how much money you’ll need in retirement and how much money you need to have saved.
Experts generally say that you should plan to replace 80% of your working income in retirement. But if you plan to drastically increase or reduce your standard of living during your retirement years, the percentage you need could be different.
Once you’ve decided upon your income needs, you can calculate your retirement number. For example, let’s say that you’ll need $50,000 of annual income in retirement. At a 4% withdrawal rate, you’ll need to save $1.25 million before you retire ($50,000 / 0.04 = $1,250,000).
For more personalized results, consider using a retirement calculator like the ones offered by Personal Capital or Blooom. The retirement calculator from Personal Capital will run 5,000 Monte Carlo simulations on your portfolio to determine your probability of success. And the calculator from Blooom can help you find hidden fees that may be eating away at your returns.
2. Evaluate the Asset Allocation of Your Investments
Asset allocation is the mix of assets (stocks, bonds, cash, etc.) in your portfolio. Investing in multiple asset types improves your diversification. But you’ll want to carefully consider how you divide your money into these assets based on your risk tolerance and your time horizon.
As a general rule, the closer you are to retirement, the less you should be invested in stocks. One rule of thumb to decide how much of your portfolio should be in stocks today is to subtract your age from 110 to 120.
So, following this rule, a 30-year-old would look to be 80%-90% invested in stocks. But a 60-year-old would want to choose a more conservative asset allocation, with stock investments representing no more than 50%-60% of their portfolio.
If you want a “set-it-and-forget-it” solution, you can invest in a target-date fund from Vanguard, Fidelity, or one of the other top stock brokers. These funds will automatically move your asset allocation towards lower risk as you near your desired retirement date.
3. Pay Down Debt
If you have credit card or personal loan debt, there’s a good chance that you’re paying close to 10% or more in interest. At rates that high, it’s a no-brainer to pay down those debts as fast as possible, preferably before you retire.
Reducing the rates you’re paying on consumer debt through balance transfers or personal loan refinancing could help you save even more along the way. Debt consolidation may be worth considering as well.
So that covers high-interest debt. But what about debts that tend to have lower rates, like mortgages or student loans? Should you pay those off before retiring too?
With mortgage rates at all-time lows, it may make more financial sense to increase your retirement contributions than to direct those funds towards extra house payments. But to decide if you should pay down your student loans or invest, you’ll want to consider things like your loan interest rate and whether or not you’d be passing up a 401(k) match by prioritizing debt repayment.
4. Think Through Your Withdrawal Strategy
Reaching your retirement savings number is a great accomplishment. But your work is only halfway done. Now you need to design a tax-efficient withdrawal plan.
Typically, you’ll want to begin by withdrawing from investments that are in taxable accounts, followed by tax-deferred retirement accounts (401k, 403b, IRA) and then your Roth accounts if you have any. In this way, your accounts that are the most tax-advantaged are also the ones that have the longest to grow.
Thinking about retiring early? Know that you typically can’t withdraw from your retirement accounts until age 59 ½ without incurring a 10% tax penalty. However, if you’re over 55 and have a 401(k) with your current employer, you may be able to begin taking penalty-free distributions immediately after you retire.
With traditional IRAs and 401ks, you must begin taking Required Minimum Distributions (RMDs) once you reach age 72. There are no RMDs with Roth accounts, however.
5. Decide When to Take Social Security Benefits
You can begin receiving Social Security benefits as early as age 62 and as late as age 70. The longer you wait to take benefits, the larger your monthly benefit amount will be.
So should you take your benefits for a longer period of time or try to maximize your benefit amount per month? Ultimately, the answer to that question will depend on when you plan to retire, your retirement income needs, and other factors like your health and your family’s history of longevity.
If you want to know from a purely financial perspective how either strategy would affect your monthly benefit, you can use the SSA’s Retirement Estimator. This tool can give you your full retirement age and show how your monthly benefit would be impacted by taking benefits earlier or later.
6. Close Any Health Insurance Gaps
When many people retire, they also lose employer-sponsored health coverage. Unfortunately, if you retire before age 65, you’ll also be ineligible for Medicare.
To bridge this health coverage gap, you may want to buy an individual health insurance policy from the Health Insurance Marketplace® or from a private insurer. Keep in mind that you won’t have to wait for the Open Enrollment to add Exchange coverage as losing your employer’s insurance qualifies you for a 60-day Special Enrollment period.
Even if you’re eligible for Medicare, you may still have health insurance gaps to fill. For example, you’ll need to add Part D if you want prescription coverage. And you’ll need to add a Medigap policy if you want coverage for optical and dental care.
Finally, keep in mind that Fidelity estimates that the average 65-year-old couple will spend $295,000 on healthcare costs in retirement. In addition to your retirement accounts, saving money in a Health Savings Account (HSA) could help you prepare for these out-of-pocket expenses.
7. Plan for Long-term Care
Most people base their retirement numbers on their current living situation and expenses. But would your estimated monthly retirement income be enough if you needed to pay for long-term care at your residence, an assisted facility, or nursing home?
According to the Administration for Community Living, a 65-year old today has nearly a 70% chance of needing long-term care at some point later in life. And depending on the level of care you need, costs can range from $68 per day to $7,698 per month.
For many retirees, covering those kinds of costs out-of-pocket simply isn’t feasible. That’s why it’s important to plan for long-term care today. Government services or programs that may be able to provide assistance include:
- Centers for Medicare & Medicaid Services
- Program of All-Inclusive Care for the Elderly (PACE)
- Department of Veterans Affairs
- Social Security Disability Income (SSDI)
There are also several private ways to pay for long-term care. One option would be to buy a long-term care insurance policy. Other long-term care financing options may include life insurance policies, trusts, and annuities.
8. Develop Your Estate Plan
Estate planning isn’t something that only the wealthy have to worry about. Everyone needs a plan for what will happen to their assets and belongings after they die or are no longer able to make decisions for themselves.
One of the most important items in any estate plan is the will. Your will is a document that lays out your wishes for who will inherit your property and when. Thankfully, there are now several fast and affordable ways to create wills online.
Learn More: Best Online Will Makers
Some assets like brokerage accounts and life insurance policies don’t pass to your survivors through wills. Assets that don’t go through probate are instead passed to named beneficiaries. Check the beneficiaries on these types of accounts to make sure that there aren’t any unwanted or missing names.
You may also want to consider creating a living trust for your property so that your heirs can avoid the probate process. Other estate planning steps to consider include designating a durable power of attorney, making final arrangements, and safely storing your sensitive documents.
9. Consider Rolling Your 401k or 403b into an IRA
If you’re offered a match on your employer-sponsored retirement account (such as a 401k or 403b), it’s likely your hands-down best retirement plan option. But what about after you retire from your employer? Is your 401(k) or 403(b) still the best place to keep your money?
In many cases, the answer is no. Employer-sponsored retirement accounts often offer limited investment choices or charge high fees. That’s why retirees may want to consider rolling their employer-sponsored account into a new or existing IRA with a top stockbroker. A rollover IRA can also help you consolidate all of your workplace retirement plans in one place.
Keep in mind that the “Rule of 55″ doesn’t apply to IRAs. You’ll need to wait until you reach age 59 ½ to begin taking distributions or arrange to take “substantially equal periodic payments” for at least five years.
The checklist above is a great starting point towards preparing for retirement. But if you want more personalized advice, you may want to schedule a strategy session with a financial advisor. To find a qualified fiduciary advisor near you, try using an advisor-matching service like SmartAdvisor or Paladin Registry.