How do you know when you're financially ready to retire?
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So you're approaching your sixties and starting to think more about retirement, which brings up a lot of questions. Am I ready to retire? Will I be financially secure if I retire? What is the best retirement age? The questions go on and on so let's cover some of the most important topics and questions when it comes to retirement.
What Is The Best Retirement Age?
For many, age 65 has been the target retirement age but does that number still hold true? Today, people generally live quite a bit longer than they used to. If you retire at age 65 today you have over a 50% chance of living beyond the age of 85. If you retire early, say at age 60, will you have the finances to live for 25-30 years, or more?
When working on the proper retirement age you really need to consider the long term to see if you have the finances to live a long life. As modern medicine keeps advancing the average lifespan will continue to increase as well.
What About Healthcare Costs?
Simply counting on systems like Medicare to pay for your medical bills isn't enough. Medicare typically covers around 70% of later-life medical costs, leaving you to pick up the rest. While Medicare can be a huge help, medical costs are skyrocketing out of control and even paying 30% of those costs can be a huge amount of money.
On top of that, Medicare does not cover long-term costs. For some, a long-term care insurance policy might be the way to go if the price is right. Of course, the best medicine is maintaining a healthy body and we have many health topics you can read up on here.
What About Your Mortgage?
If you planned well enough to have your home mortgage paid off then you're in great shape. This should be the goal of anyone looking to retire. Even then, keep in mind that homes have additional costs even when they're paid off. Property taxes, homeowners insurance, and utilities all add up.
Should I Get A Reverse Mortgage?
For some people, a reverse mortgage makes sense. If you're later into your retirement and need the money (or have nobody to pass your home onto after death) it might be a good idea.
Getting a reverse mortgage early in retirement, while still in your sixties or seventies, could be a huge gamble that could bite back. Instead of a reverse mortgage, look into possibly selling your home so that you can be smaller and cheaper home elsewhere. This is likely to be a safer bet. For more on this be sure to read Financial Wisdom: Live Beneath Your Means and Living Below Your Means.
Are You Planning For Taxes?
Many believe that traditional 401k and IRA retirement accounts are tax free but that isn't the case. When you withdraw money from these types of accounts you'll pay federal income tax and possibly state taxes as well (check with your state to see). Pre-tax retirement accounts like Roth IRAs are tax free in retirement but you're limited to how much you can contribute each year.
For more on retirement accounts be sure to read the Advantages Of A 401(k), the Disadvantages Of A 401(k), Opening Your First 401(K), and What To Know About Your 401(k) When Switching Jobs.
When Should I Collect Social Security?
You can actually start collecting Social Security (assuming you've paid in over the years) as early as age 62, but that may not be the best for you. The earlier you take your Social Security payments the less money you get. Waiting until you're 66-67 (depending on the year you were born) can get you up to what the Social Security Administration calls "full retirement age" and increase your monthly payments.
For many, taking payments at age 62 can mean 25% less income than if they started taking their payments at full retirement age. Waiting even longer, until you're 70 can further increase your monthly payment amount (making it over 75% more than if you started at age 62). The Social Security Administration website can help you determine the best age to start taking your payments.
What About Inflation?
This is a big one that many don't think about at all. If you're nearing retirement age now you've probably told your kids and grandkids about how everything used to cost a penny or nickle "back in the day" but somehow haven't fully planned for inflation in your future retirement years.
Many financial experts suggesting keep some portion of your retirement account in stocks since they often have the best inflation beating returns over the long run. This is important when you consider the likelihood that items costing $1 today could cost $2 in just 25 years.
The Bottom Line
There really is no single retirement age that is best for everyone. Your retirement is unique to you, your circumstances, and your financial situation.
Going through all of the questions listed above can help you calculate the most advantageous retirement age for yourself while making sure you've planned properly. As always, planning for retirement at the earliest possible age offers the highest rewards later in life as we cover in Tips For Building Your Financial Future.
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