Are you really ready to retire?
Emotionally, you might want to quit your day job, but financially, you might not be in the right place. You don’t want to retire before you are financially ready, though. If you retire before your finances are in order, there is a good chance that you will outlive your money.
Before you quit your job, make sure that you are truly ready to retire:
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1. Your Debts are Mostly Paid Off
One of the biggest drains on any retirement is debt. When you have debt obligations, that takes some of your resources. Plus, the interest you are paying doesn’t provide you with any true benefit or improvement to your financial fortunes. Debt sucks up too many of your financial resources when you are retired and trying to live on a mostly-fixed income.
While some retirees make it work with only mortgage payments for debt, there are those who much prefer to have all debt paid off before retirement. If you have a bunch of debt — especially consumer debt — you aren’t financially ready to retire.
2. Your Nest Egg Can Withstand Setbacks
Do you think your nest egg can withstand market setbacks? If one good crash and subsequent recession will destroy your portfolio beyond the prospect of repair, you might think twice about retiring just yet. If your nest egg is large enough, though, it will eventually recover from a market setback. Look into diversity as well as size when evaluating your nest egg.
3. You Have Multiple Income Streams
Even if you don’t have a huge nest egg, you can make up for it if you have multiple income streams. Look for ways to bring in money from business profits, royalties, web sites, rental properties, or other sources. Diversified income that is mostly passive can go a long way toward sustaining you in retirement — even if you have a mediocre nest egg. With diverse income streams, you can rely less on your nest egg, allowing it time to recover if there’s a setback in the markets.
4. You Have Adequate Health Care Coverage
One of the biggest expenses you will come across during retirement is health care. Before you retire, check into your health care options. If you aren’t old enough to qualify for Medicare, you will need good insurance coverage, either from your life partner’s job or from an individual purchase. Even if you are qualified for Medicare, you will need to have good supplemental coverage. Make sure that you have the right coverage to meet your needs, since one difficult illness can wipe out your entire nest egg if you aren’t careful.
5. You Feel Confident about Your Decision
Do a retirement gut check. Are you confident (or reasonably so) about your decision? We all have a few misgivings about retirement, but your gut can tell you a lot more than just that. If you are seriously concerned about what retirement holds for you, it might mean you need to make a plan and hold off for a few years.
If, however, you feel good about your financial situation, that might be just the clue you need that you really are financially ready to retire.
Ohh I long for the day when this finally happens. It would be wonderful. Although, I still think I’ll be frugal or be wise about my spending. It’s a habit.
I agree and would add that having a decent emergency fund and a budget are helpful. Another step towards peace of mind is to set aside 2 – 3 years of distributions in cash via laddered CDs, etc. to cover any extended market downturn — that way you can allow your investments to grow back without cashing them in while at a depressed level.
These are great considerations when thinking about retirement! I would add that you should make sure you know what you want to do when you finally hang it up at work. Talk about it with your spouse and family. Perhaps this meshes with developing some of those multiple streams of income you mention. Maybe it’s furthering your education. Whatever it is, you and your spouse need to be on the same page when it comes to planning out this next chapter in your lives.
I focus a good deal on this in my blog (realmilitaryretirement.com), but I focus most of it on active duty military folks considering retiring after their service. In our line of work there is also an issue of identity. “I know who I was when I wore the uniform, but now who am I? What is my purpose?”
Planning for the mental part of retirement can be just as challenging, and is at least as important as the monetary side.
I love this. So often people think retirement is all about savings, but there are other factors to consider. This post should be used as a checklist for everyone thinking about retirement.