Retirement can be an exciting, enjoyable period of life if you prepare for it appropriately. Unfortunately, many people jump into retirement blindly, and thus wind up stressed out and disappointed after the fact. If you follow these steps, however, you'll help ensure that you're actually ready for retirement by the time that milestone rolls around.
1. Know what your living costs will look like
Many people assume that their living costs will drop drastically in retirement, but in reality, yours might largely stay the same or even increase in certain categories. Take healthcare, for example. The average 65-year-old man today will spend $189,687 on medical care in retirement, while the average 65-year-old woman will spend $214,565. Know what services Medicare will and won't cover, and plan for them accordingly.
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At the same time, think about the lifestyle you want to lead in retirement and what it will cost. Will you own a home? Multiple vehicles? Will you live in a pricey city or someplace more affordable? Getting a picture of what your regular expenses will amount to will help you better plan for your golden years.
2. Understand how to assess your savings
It's not enough to just look at a number on a screen and call it a day, even if that number is seemingly pretty large. For example, a $500,000 IRA might seem like a lot of money, but how much annual income will it actually give you in retirement?
A good way to figure that out is to apply the 4% rule. The rule states that if you begin by withdrawing 4% of your nest egg's value during your first year of retirement, and you then tweak subsequent withdrawals to account for inflation, your savings should, in theory, last for 30 years. While it's not a perfect rule, it can help you determine how well your savings are likely to hold up once your golden years kick off.
Let's imagine you expect to need $45,000 annually in retirement, $20,000 of which will come from Social Security. That leaves you with a yearly $25,000 gap to fill. If you multiply $25,000 by 25 as per the 4% rule, you'll arrive at $625,000. Therefore, if you're sitting on a $500,000 savings balance, you'll know that it's not quite enough money to retire on -- even if it looks impressive at first glance.
3. Figure out when to file for Social Security
Your Social Security benefits are based on your top 35 years of earnings, but the age at which you file for them can cause that number to go up, go down, or stay the same. If you file at your full retirement age (either 66, 67, or somewhere in between, depending on when you were born), you'll get the precise monthly benefit your earnings history entitles you to. However, you're allowed to claim benefits as early as age 62 and as late as age 70 (technically, you don't have to file at 70, but there's no reason to delay past that point). The former move will reduce your benefits (most likely on a permanent basis), while the latter move will permanently increase your benefits.
So when should you file for Social Security? It depends on a number of factors. First, ask yourself how badly you need the money. If you're short on savings, and you can increase your Social Security benefits by waiting past full retirement age, then it pays to do so. On the other hand, if your savings are healthy, but those benefits will allow you to better enjoy the earlier part of your retirement, then you might claim them a few years ahead of full retirement age, even if you do take a hit in the process. The key, either way, is to have a strategy in mind before you actually retire.
4. Have a plan for occupying your time
Retirees are 40% more likely to fall victim to depression than workers, and the reason often boils down to feeling bored and restless. A big part of gearing up for retirement, therefore, is figuring out how you'll spend your days. Keep in mind that the activities you choose need to be realistic given your financial situation. You might like the idea of joining a country club to socialize and play golf, but if you can't swing the membership fee, you'll need to come up with a less expensive alternative. Crunch some numbers to see how much you can afford to spend on leisure, and find activities that allow you to maximize your budget without going overboard.
The more you actively plan for retirement, the greater your chances of enjoying that time to the fullest. Take these crucial steps to make the most of your golden years -- because after a lifetime of hard work, that's what you deserve.
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