5 Money Questions To Answer Before You Retire
Written by
John Csiszar
Edited by
Jenna Klaverweiden
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Many Americans look forward to retirement as the time when they can finally relax and enjoy their lives after putting in decades of hard work. But nothing is guaranteed in life, especially a happy retirement. Without advance preparation, retirement may actually be a struggle.
To avoid finding yourself in this position, start preparing today. Even if retirement is already on the horizon, there are steps you can take to be in a better financial position once you finally hang up your work boots. Here are the questions you should be able to answer before you take the big step into retirement.
1. What Will Your Sources of Income Be?
The most significant financial change in retirement is that you’ll no longer have a steady source of income from an employer (or a business, if you were self-employed).
While Social Security plays an important role in terms of many retirees’ income, the average monthly check is just $1,955.48, according to the Social Security Administration. This amounts to a scant $23,465 or so per year. While theoretically possible to live off that amount in certain areas, most seniors plan on having a much more enjoyable retirement.
To reach that goal, you’ll want to develop as many sources of income as possible. Here are some common options.
- Pensions: If you’re lucky enough to work for an employer that still has a pension plan, this can be an excellent source of retirement income. While your pension plan may have a number of different payout options, many workers receive a fixed payment for life.
- Retirement accounts: Most large employers offer 401(k) plans these days instead of pensions. For many workers, a 401(k) plan provides the bulk of their retirement savings. IRAs are another popular choice. While traditional IRAs allow potential tax deductions on contributions, distributions are taxable. Roth IRAs are funded with after-tax money, meaning no deductions, but qualifying withdrawals are tax-free in retirement.
- Rental income: Many retirees supplement their retirement income with rental properties, which provide a relatively consistent stream of monthly payments. Typically, rents rise over time, more or less in line with inflation, making them a good way to help fund retirement. Rental real estate can also provide tax benefits.
- Personal investments: A separate portfolio of stocks, bonds, exchange-traded funds and other investments can provide both capital appreciation and dividend/interest income in retirement.
2. How Much Will You Realistically Spend?
Once you’ve determined what your potential cash flow may be in retirement, it’s time to itemize your expenses. This part can get tricky, as your spending patterns in retirement might be quite different from what you’re used to in your working life.
Many retirees will face additional travel and healthcare expenses — including, potentially, long-term care — but other costs may decrease. By the time you retire, for example, you may have paid off your mortgage, and you may see your clothing and transportation costs fall as you no longer need to dress up and drive to an office.
Each individual is unique, however. While the general rule is that retirees need about 70% to 80% of their pre-retirement income, you’ll have to analyze your own current and future spending needs to see how they may differ.
3. How Much Inflation Are You Anticipating?
The financial reality is that if you want to maintain the same standard of living throughout your retirement, you’re going to have to spend more money every year. While the long-term inflation rate of about 3% doesn’t sound too daunting, it means that prices will double just about every 24 years.
That means if you spend $60,000 per year and are planning on a 30-year retirement, you should expect to be spending closer to $120,000 per year in your final years, all else being equal. This is a critical variable to factor into your long-term planning.
4. Do You Plan on Leaving an Estate or ‘Dying With Zero’?
One of the single most important decisions when it comes to retirement planning is what type of financial legacy you want to leave behind.
If you plan on passing hundreds of thousands of dollars to your heirs when you die, it will obviously take a lot more planning than if you choose to “die with zero.” But don’t be fooled — the “die with zero” strategy still requires a lot of planning so that you don’t outlive your income.
5. Do You Have a Backup Plan?
Retirement planning is all about making projections. But as there are so many unknown variables involved, even the best-constructed plan might not get you where you want to go. This is why you have to build a backup plan as well.
If your portfolio drops 15% in your first year after retirement, for example, you might have to cut back on your spending right away to make sure you don’t outlive your money. If financial emergencies hit — and they usually do — you’ll want to be sure that you have an adequate emergency fund in place. Similarly, it’s important to make sure that you’re adequately protected by insurance to avoid losing everything in retirement if calamity strikes.
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