Determining the right time to retire is no easy task. With far-reaching financial and emotional effects, the retirement decision is one of the most critical choices that pre-retirees will make. Unfortunately, some workers fail to carefully consider all of the factors that affect their decision, leading them to retire earlier than they should.
Addressing the areas below may help to ensure that you make the move into retirement at the right time.
Failing to establish a comprehensive financial game-plan is one of the biggest mistakes pre-retirees make. In fact, according to the Employee Benefit Research Institute’s (EBRI) 2013 Retirement Confidence Survey, “Only 46 percent of workers report they and/or their spouse have tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement.” That’s right, more than half of those preparing to retire haven’t even reviewed the numbers.
It is critical for pre-retirees to have an awareness of how much to save, how much they need to earn prior to and after retirement, the maximum amount that can be spent during retirement and how long their financial resources will last.
It may also be helpful to stress test your retirement scenario against higher rates of inflation, changes in interest rates or another stock market drop. Not only do the results of a financial analysis identify how much you can afford to spend during retirement, they also help to determine the proper asset allocation for investment portfolios that may supplement Social Security or a pension.
Consider thoroughly crunching your numbers to develop a plan as this may help provide clarity on the financial implications of the retirement decision.
Another mistake people make is not figuring out what they will do in retirement to replace the fulfillment of a working life.
While numbers are certainly important, the emotional aspects of retirement are the other side of the retirement planning equation. Are you emotionally ready to make the transition?
Have you developed a game-plan for how you will spend your time and make the most of every day?
From spending time with your family to pursuing hobbies and volunteer work, identifying what means most to you in your life is essential. While focusing on the emotional aspects of the decision will help, many retirees will still go through an adjustment period after they retire. Be sure to spend time identifying what you value most as this may lead to a smoother transition.
People also have to be careful about not carrying too much debt with them into retirement.
Paying retirement expenses is challenging enough without having to deal with other substantial debts. High mortgage balances, credit cards, auto loans and student loans for children can all get in the way of maintaining your lifestyle.
The EBRI’s survey also notes that “55 percent of workers and 39 percent of retirees report having a problem with their level of debt, and only half (50 percent of workers and 52 percent of retirees) say they could definitely come up with $2,000 if an unexpected need arose within the next month.”
Ideally you want to transition into retirement with few liabilities so that the majority of your income can go to you, rather than to creditors. If this isn’t the case yet, it may be wise to address your debts prior to retiring.
Having children who are financially dependent is another thing retirees need to be ready for.
Empty nesters have been surprised to find that many adult children are coming back to the nest after college. In fact, challenges in the job market coupled with increased expenses associated with apartment living have forced many adult children to remain in the nest until their late twenties or thirties.
Additionally, many people have chosen to have children later in life and the financial obligations associated with this can lead to the postponement of retirement. Bottom line: It is difficult for you to be financially independent if your children are not.
Finally, people contemplating retirement need to plan for the cost of medical care.
Health care expenses continue to increase dramatically each year. Additionally, there is a tremendous amount of uncertainty about how Medicare benefits will be funded over the long term.
With fewer and fewer workers having access to group health insurance during retirement, retirees must have a plan to address these increasing health care costs. Carefully review your health care plans prior to making the jump into retirement.
Financial planning is a critical component to making the right retirement decision. Since everyone’s situation is unique, consider speaking to your financial adviser to determine the appropriate game plan for you.
Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner and wealth advisor. He can be reached for questions at (732) 280-7550 and kurt.rossi@Independentwm.com. LPL Financial Member FINRA/SIPC