If you are like many, you cannot wait for that day when you no longer have to work. You may be asking yourself, “How much do I need to retire, and which boxes do I have to check to know I am ready?” Here are some general guidelines to help discover how close you are to retirement:
You Have a Monthly Income Stream to Cover Living Expenses and Taxes
While it is important to focus on your net worth (your total assets minus your total liabilities), this may be misleading when it comes time to consider retiring. Money tied up in long-term investments or real estate can look great on paper but not provide you with a monthly income stream. When you look at your monthly income stream, focus on line items such as pensions, annuity payments, and money earned from interest. This will go towards the money needed to pay for monthly expenses. Unfortunately, when you stop working the bills don’t stop coming in.
You Have Affordable Medical Insurance
Once you turn 65, you will be able to receive Medicare. If you are looking to retire before then, make sure you do some research to determine what your coverage will look like and how much it will cost.
You Have at Least Six Months of Living Expenses Saved
It is wise to aim to have enough cash saved to cover at least six months of living expenses. Many financial experts also recommend having two to three years’ worth of living expenses saved in cash or short-term investments.
You Have a Plan in Place that Accounts For ~3% Inflation per Year
Most retirement calculators let you set a level of inflation – make sure you take this into consideration. Inflation is the rate of increase in prices over time. In simple terms, some items cost more over time. To be safe, it may be wise to meet with your money mentor who can run several scenarios for you with varying assumptions for savings, inflation, expenses, and spending.
You take Social Security Payments at the Right Time
You can start collecting Social Security as early as age 62. Most Americans on average say that their desired retirement age is 65, but the reality is the average is 62, coinciding with the minimum age for social security. It is important to keep in mind that the earlier you begin collecting, the less your monthly payment is. If you are in good health, you could live a long time. It is essential to the math on when it is best to start taking these payments to make sure your nest egg will provide you with the security needed to retire in comfort.
You Plan to Pay $100,000+ in Out-Of-Pocket Medical Expenses During Retirement
Even with Medicare and supplemental plans, out-of-pocket medical costs for a retiree can cost hundreds of thousands of dollars. Keep this in mind even if you are in good health when you retire.
You are Debt Free (or Have Minimal Debt)
Do all you can to be completely debt free – this includes paying off your house. The less you owe, the less you need to live on.
You Have a Backup Plan in place in Case You Retire Too Early
There are numerous stories of early retirees who were ambushed by unexpected expenses or cuts in their income and, as a result, had to return to work. You may not mind having to work in a call center or a grocery store but make sure you have a Plan B in place before you retire.
When it comes to making sure you are prepared for retirement, there are many variables, and it often requires performing calculations to ensure you are on track. Be sure to discuss your unique situation with your money mentor and use tools like the lifetime income calculator on MyMentoro before making the decision to call it quits.
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