When you start thinking about retiring, you probably think of putting an end to waking up at 6:00 a.m. and to all those tiring and long hours at a job you probably hate. But oftentimes, it’s really not that simple, especially since most of us, if we had the option, would definitely retire at 25.
In reality, what it really takes to retire is a solid grasp of your budget and a carefully considered investment and spending plan for your life savings. Added to that, there’s also debt that’s under control, and a plan you are actually excited about for how you really want to spend your days. Having that in mind, here are 10 of the most important signs you’re not ready to retire yet.
Struggling to pay current bills
Well, it goes without saying that if you are really struggling to pay your bills with a paycheck from work, then retiring won’t make things any easier. As a general rule, seniors need around 75% of their pre-retirement income to fully enjoy a comfortable retirement.
That income generally comes from Social Security, 401(k)s, IRAs, a pension, and other types of savings. And what you need to ask yourself is if these sources will give you enough income to meet your obligations and enjoy your free time.
Because here’s the thing, commuting costs and dry-cleaning expenses could decrease, but entertainment and travel might increase. It’s very important to take taxes and healthcare expenses into consideration.
Your Social Security check could be taxable, depending on your overall income. The wide majority of pensions are taxable. Withdrawals from traditional 401(k)s and traditional IRAs can also be taxed.
High level of debt
Huge amounts of debt could severely strain your savings once you retire. If you can, we recommend you reduce or eliminate credit card payments or even car loans. Depending on this situation, paying off your mortgage or downsizing could also help in the long run.
Paying down your debt before retiring could also imply working more years than you would prefer, but it could likely be worth it for the sense of ease that comes with not having all those monthly payments hanging above your head. Getting rid of debt, however, including your mortgage, would imply getting rid of interest payments that can also take a toll on your long-term finances.
No plan for future major expenses
The last thing you want is to wait until you have retired to address huge and foreseeable expenses like replacing your roof, repaving the driveway, or even buying a vacation home or a car. These larger expenses can easily add up, especially when funds are withdrawn from taxable accounts and taxes require to be paid on every single dollar.
We also encourage clients to tackle bigger expenses before retirement, especially since the impact on their portfolio can be quite significant. Let’s say you need a new roof, which would add to $7,000, a new driveway, which will cost you $4,000, and a new car ($10,000 down and $300 per month.
All these purchases require $21,000 upfront, which means that you need to take almost $28,000 in pre-tax withdrawals from your retirement account, and that only if you are in the 24% federal tax bracket.
An unknown Social Security Benefit
Since you might not be relying on Social Security to meet the wide majority of your expenses, you shouldn’t ignore it, either. If you are like most people out there, and you haven’t yet estimated how much your benefit will be, then the Social Security Administration has a handy tool to help you make that type of calculation.
Walters also adds that if you haven’t reached full retirement age for Social Security, which is also the age at which you can collect your maximum Social Security monthly benefit, you might want to postpone retirement until you do so.
If you start claiming Social Security checks as early as 62 years old, your monthly checks might be 30% smaller than if you actually wait until you reach full retirement age.
No monthly financial plan
As soon as you retire, paychecks automatically stop arriving, obviously. We can’t say the same thing about the bills. You might need to map out your monthly cash flow before you retire. Planning your monthly cash flow also means considering when you will start drawing Social Security benefits and exactly how much you will receive, besides how much you will withdraw from your personal retirement accounts and in exactly what order.
If you possess a traditional IRA and a Roth IRA, for instance, you need to think about the taxes and also the required minimum distributions (RMDs), on your traditional IRA withdrawals and how that could affect your Roth IRA withdrawals, which won’t even be taxed and aren’t subject to RMDs.
No long-term financial plan
You should be able to understand how long your savings will last and what will happen exactly with the level you are able to maintain over the coming decades. No one knows exactly how long they will live, but higher lifespans and increasingly higher costs of long-term care could also mean your portfolio will have to last longer and stretch further than you once thought.
There’s also an ongoing debate about how much you should actually withdraw from your portfolio every single year. There’s the popular 4% rule, which basically states you can tap 4% of your retirement assets every single year, but that one is projected to allow your money to last a minimum of 30 years in most cases.
Not accounting for inflation
Inflation will definitely affect your day-to-day expenses and the overall value of your life savings. An inflation rate of 3% would also imply your expenses will double in less than 25 years, which is well within a typical retirement period.
The current inflation rate is way higher: 8.3% in August 2022 inflation rate was 8.3%, which is less than the June 2022 stats. Now, deciding to overlook these details is probably one of the most common retirement planning mistakes one can make and could have serious long-term implications if not properly accounted for.
Not rebalancing your portfolio
Deciding on a passive approach to invest might work when you are way younger and have a lot of time to make up for any market downturns that could hurt your portfolio. However, as you approach and enter retirement, it can be quite smart to rebalance your portfolio annually and focus on income generation and asset protection.
There’s also an accepted wisdom about how retirees are advised to manage their portfolios: diversifying, preserving capital, earning income, and avoiding risk. Well, diversifying across a wide variety of asset classes but also industry sectors, whether it’s healthcare, technology, and so on, would help protect your portfolio’s value when the market declines, especially since one instrument or asset class could perform well when the other one isn’t.
Retirement worries you
What if you have your portfolio in top shape, and you still don’t feel ready to let go of your working life? Working generally takes up tons of energy, and some people can become quite anxious, rather than excited.
If this sounds anything like you, just think about pursuing a “second act” venture, working part-time, or even becoming a volunteer for an organization you truly care about. If you simply retire without a plan, you might overspend in an effort to combat boredom and run through your savings faster than you initially planned.
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