The Boomerater™ Report, our weekly collaboration with online baby boomer resource Boomerater, this week explores four questions you need to ask yourself to determine if you are financially ready for retirement. These four questions are part of a 10-question checklist written by registered investment advisor Michael Miller, featured in Boomerater’s financial advisor directory.
[See also Four Signs You're in Retirement Denial.]
1) What is your vision for retirement? Planning for retirement is not that much different from planning for a vacation. Before taking your trip you must first determine your destination. What do you dream about doing in this new exciting phase of your life? Take the time to find a quiet place and let yourself go with this question. Do not hold back. Make a written list. Next, you want to categorize your goals into needs, wants, and wishes. Needs are the things that you absolutely cannot do without in retirement such as monthly living expenses. Wants are the things that are next in line after all of your needs are met. Last, but certainly not least are your wishes; these are the things you would like to do, see, or have if you had unlimited time, resources, talents, and abilities. You know you are on the right track if your wants and wishes inspire and excite you! Finally, in order to make your goals achievable, you will want to quantify them by determining their cost and putting a deadline on them.
2) When would you like to retire? The answer to this question is important for a couple of reasons. Your retirement age has a huge impact on the amount of savings needed for retirement. The age you choose can determine how much you can expect from a company pension plan as well as social security benefits. The more income you receive from these sources the less you will need from your personal savings. In addition, your retirement age also dictates how long you will spend in retirement and therefore how long your savings will have to last. By establishing a date you or your financial planner is then able to calculate how much you will have to have saved by the time you retire taking into account such factors as your goals, retirement resources, inflation, and life expectancy.
3) Where will you live? If you are like many of my clients you want to move closer to your grandkids when you retire. Every state and locality has a different cost of living and tax structure. Some places are more budget friendly to retirees. You may also plan on downsizing. Many retirees find that they don't want all the upkeep and expenditures of their current homes as they get older. Downsizing can lead to huge savings over the lives of retirees. Where you chose to live can have a significant impact on how much you will need to have saved as well as your quality of life in retirement.
[See our Best Places to Retire.]
4) What are your income sources in retirement? Any income you receive from pensions, Social Security, part-time work, or a business can significantly reduce the amount of income needed from savings. The formula is: Total Income Needed minus Income from all Sources equals Income Needed from Savings and Investments. Some income sources may be limited to a certain number of years during retirement. For example, you may retire at age 59 but won't start receiving income from Social Security until 62. Therefore, you will have to plan for three years' worth of income that will not come from Social Security during this initial phase of retirement.
[See also How to Get Your Finances Back on Track in 6 Steps.]
Continue reading the rest of the 10-question checklist for retirement readiness.