If I leave my job now, I think I'll have enough money to live comfortably the rest of my life. So is there any reason I shouldn't stop working and retire? --J.Z.
If you think you've got the means and the inclination to call it a career, I say go for it. My only caveat is that, before you do, make absolutely sure that you're not only financially prepared to retire, but that you're also ready to make the social transition from the work-a-day world to retirement.
The last thing you want to do is hand in your notice at work only to later find that you don't actually have the money you'll need for a comfortable retirement or that you're unable to enjoy your newfound freedom because you haven't given enough thought to how you'll actually live once you no longer have the routine of a job to provide structure to your life.
So before you cut your ties to the workforce, I recommend that you answer the five questions below that make up my "Are You Really Ready To Retire?" Checklist.
1. Do you have the financial resources you'll need to support you the rest of your life?
The question is straightforward, but coming up with an accurate answer can be more difficult than you think. For example, a recent study by the Boston College Center for Retirement Research found that more than 40% of working-age Americans had an unrealistic sense of whether they were on track to maintain their standard of living in retirement, with close to half of that group being overconfident about their prospects.
So how can you determine whether you've got the financial wherewithal to live a comfortable life once the paychecks stop? Start by getting an accurate sense of how much income you'll need to cover your living expenses after you retire. The best way to do that is by going to an online budgeting tool like BlackRock's Retirement Expense Worksheet. Be as accurate as possible, but remember that you can, and should, refine your estimates as you get a better handle on your expenses and spending.
Once you have a figure you're reasonably confident about, you can plug that number, as well as such information as your age, your retirement account balances, the amount you'll receive from Social Security, pension income, if any, and how long you expect to live in retirement (I'd say into your mid-90s is a decent estimate given today's longer lifespans) into a tool like T. Rowe Price's Retirement Income Calculator. The tool will estimate your chances of being able to get the income you need for as long as you'll need it.
If you're not comfortable going through this sort of exercise on your own or you'd just prefer having an assessment from a pro, you can always hire a financial adviser to do this analysis for you.
2. Have you considered how you'll generate income for retirement?
It's not enough just to be sure that your resources can support you. You also want to have a comprehensive retirement income plan that spells out how you'll actually get the income you'll be relying on to support you throughout retirement.
Among the issues you'll need to consider as you create an income plan: How much you'll receive from Social Security and whether you should you consider delaying claiming your Social Security to boost the size of your check; how much of your nest egg's value can you withdraw each year without incurring too big a risk of running out of money before you run out of time; and whether you should devote a portion of your savings to an immediate annuity or a longevity annuity, so you'll have a another source of guaranteed lifetime income in addition to Social Security.
3. Do you have health insurance squared away?
Along with housing, food and transportation, health care is one of the largest retirement expenses, accounting for up to 15% of spending on average depending on the retiree's age, according to the Bureau of Labor Statistics' Consumer Expenditure Survey.
If you're retiring at 65 or older, you'll most likely be relying largely on Medicare to deal with the medical expenses you'll incur during retirement. If you're leaving your job before that age and don't receive health insurance through your, or your spouse's, former employer, then you'll have to get it on your own. Either way, you want to know ahead of time the terms and conditions of coverage and have a good sense of what you'll pay not just in annual premiums, deductibles and co-pays but other out-of-pocket costs as well.
You can get good overview of Medicare -- the types of coverage available under the program; the various costs; what Medicare covers (and, just as important, what it doesn't); when you should sign up to avoid penalties -- by going to Medicare.gov, the official Medicare site.
As you're no doubt aware, things are, shall we say, kind of up in the air when it comes to private insurance these days, what with the (so far, at least, unsuccessful) attempts to repeal and replace Obamacare. But you can get an idea of what you might have to pay for coverage, at least for now, by going to sites such as Healthcare.gov, HealthPocket.com and eHealthInsurance.com. That said, you'll want to stay abreast of the ongoing health-care debate to see whether new developments affect the terms of your coverage as well as what you'll pay.
4. Is your retirement portfolio in shape?
In 2007, just prior to the stocks losing more than half of their value during the financial crisis, more than four in ten 401(k) participants age 56 to 65 had in excess of 70% of their 401(k) account invested in stocks, according to an Employee Benefit Research Institute report. As a result, many older 401(k) participants saw substantial declines in the value of their nest egg.
There's no single correct stocks-bonds mix that's right for all retirees (although many tend to keep between 30% and 60% of their assets in stocks). But the idea is that you want to invest enough of your savings in stocks to provide the returns you'll need to maintain your purchasing power over the course of a long retirement, but also enough in bonds to provide some ballast during the market's inevitable periodic setbacks.
5. Do you have a plan for how you'll actually spend your time after you retire?
Chances are you'll be spending upwards of 30 years in retirement. To make this phase of your life satisfying and meaningful rather than a period of just marking time, you'll need to some "lifestyle planning."
That means giving serious thought how you'll actually live after you do. Will you remain in your current home or downsize to something smaller? Stay in the same neighborhood or relocate to an area with lower living costs? Do you have a circle of friends and family that will keep you socially engaged? Have you lined up activities (part-time work, a workout regimen, a hobby or avocation, charitable work) that can help keep you physically fit and mentally alert?
Ideally, you'll want to think about all these lifestyle issues before you actually retire. The same goes for answering the other questions on the checklist. After all, if you've been saving, investing and planning for a secure and rewarding retirement diligently throughout your career, it would be a shame to drop the ball just when your goal is within reach.
