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Are You Ready To Retire? Answer These 8 Questions First

You've heard that alarm clock ring for decades. You've dealt with short deadlines, micromanaging bosses, overtime, work trips where you only saw the inside of conferences rooms, and heard the term "laser focused" one too many times. But guess what? You are near the finish line! But how confident are you in your retirement plan? Are you aware of the hurdles you'll need to go over to help ensure a long and hopefully, stress-free retirement? Be sure you answer these 8 questions first. 

Do you have enough retirement savings?

This is the first and most obvious question to answer. How do you know whether what you have will be enough? As with most things financial, it really depends on your situation BUT there are some general guidelines to stick to. 

You need to do an estimate of how long your retirement is likely to last. This involves the not so fun task of estimating how long you think you will live and subtract your retirement age. 

Now, based on your retirement span, you will have to estimate what a safe withdrawal rate (amount you will be pulling out of your retirement savings each year) is. The longer your retirement, the lower your withdrawal rate should be. A good baseline is what is commonly referred to as the 4% Rule. 

The 4% Rule comes from a famous study referred to as the Trinity Study (actual paper was called "Retirement Savings: Choosing a Withdrawal Rate That is Sustainable"). I will summarize but if you're a super nerd, like myself, and want to read the whole thing, here is the link.

3 professors at Trinity College used historical returns to test the affect various withdrawal rates (between 3-7%) and asset allocations have on your retirement fund lasting different retirement lengths (between 15-30 years). It did not take into account taxes or transactions costs.  What they found was that a portfolio comprised of 75% stocks/25% bonds had a 98% success rate over a 30 year time horizon pulling 4% of the retirement assets out per year. Another way of saying this would be having at least 25 times your yearly expenses could give you a 98% chance of your money last 30 years by using historical returns. 

As with any sort of estimates, there are shortcomings to these results. First and most obvious, we have no idea what future returns will be on any investments. Second, some people see a portfolio holding 75% stocks as being quite aggressive and could lead to large decreases in value. Third, their success factor was whether the portfolio still had value at the end of the time period. I.e. if your portfolio had $1 left after 30 years it was successful. Not everyone would be ok with that scenario. Last, it does not take into account other forms of income like Social Security or a pension. 

The Trinity Study has been thoroughly reviewed for many years and is typically considered sound in principle. Use it as a good starting point but be sure to look into other factors. 

Have you created a retirement budget?

Look at your last 5 years of actual expenses and categorize them to understand where you have spent your money in the past. Do you still have a mortgage? What will your daily retirement life look like? Ask yourself how applicable the previous years' numbers are and if it is realistic for what you expect to spend. 

Take into account any retirement goals you have (big trips, new lake house, new vehicles, etc) and include them in your budget. To obtain your needed assets to fund your budget, take your yearly budget minus any income sources (Social Security, pension, part time work) and multiply that number by 25 and see how this compares to your investments. This is just a baseline number. You situation may vary and it may be a good idea to meet with a financial planner to ensure you haven't missed anything.

The biggest expense to keep in mind is likely to healthcare, which we will cover next.

What is your plan to cover healthcare costs?

This is a tough one to dissect because of the inevitable differences between individuals. You will have to take a hard look at your personal health and consider any underlying health conditions you have and how much it will cost you moving forward.

Employer retirement healthcare coverage has decreased in recent times and Medicare coverage doesn't start until 65. The Fidelity Retiree Health Care Cost Estimate says an average retired couple (age 65) in 2022 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement (source). This number may change based on your age, your personal health, and what types of retirement accounts you use to pay for these expenses (HSA, 401k, Roth). This is a good time to mention that is an average so some will experience even higher costs. 

If you are under 65, do your research to figure out the best option to continue coverage if you retire and what the costs will be. Possible options before 65 would be having a working spouse cover you under their benefits or looking into private insurance options. If you are 65 or older, consider what Medicare options you will enroll in, the cost of these, and whether you will need supplemental coverage above and beyond this.

Lastly, consider long term care costs. These can be substantial, especially if you want top-of-the-line care or in home care. As of 2023, the median cost for assisted living facilities is $54,000 (source). Medicare coverage can vary based on a number of factors for long-term care so it is difficult to guarantee what it will cover. The next piece of the puzzle is how long do people typically stay in long-term care facilities. According to a scholarly article from the National Library of Medicine, the average stay is 13.7 months and the median stay was 5 months (source). 

Is your asset allocation correct (are your assets in the right place)?

Take a look at my Beginner Investor Series, Lesson 6 to learn more on the topic but just understand this is a big piece of ensuring your have a sound plan. Your risk tolerance in retirement is likely much less than when you are working for the obvious reason of no longer have an income to pay your bills. Having this allows for you to ride out market downturns because your income pays for your bills. In retirement, you may have to pay your bills with your retirement assets which can cause a double-whammy of sorts by having to pull money out when the market is down. This has the unwanted consequence of being especially painful as you are taking a larger percentage of your total assets when the market is down compared to when it is up. 

So what is the correct asset allocation? Once again, it will depend on your unique situation but in my ongoing effort to try to be helpful, here are some ideas: 

  • Have an emergency fund of at least 1 year's worth of expenses. Put this into an account that can be easily accessed like a high-yield savings account. 
  • Have a couple year's worth of expenses in low-risk investments. This will allow a person to ride out any market downturns by pulling from this "bucket" versus having to pull from assets that may have lost value. 
  • Invest into a diversified portfolio that balances the need to preserve capital, generate income for expenses, and grow assets which will maintain purchasing power. 
  • Always be cognizant of the tax implications of an individual's investments. It is usually best to find legal means of delaying paying taxes by not having taxable events. Let's dive into that a bit more. 

Is your plan tax efficient?

Nobody wants to pay taxes, right? They are as inevitable as anything else in life but there are ways to delay or minimize this tax burden. Here are a few ideas on this topic:

  • If you have multiple investment types in terms of tax implications (qualified vs non qualified vs non-tax advantaged), think about what would be the best way to pull from them in a tax efficient manner. For example, depending on your tax bracket, it may be beneficial to pull from a brokerage account that would have long-term capital gains tax that may be less that paying income tax on a qualified account. 
  • Be mindful of Required Minimum Distributions on qualified accounts like your 401(k) or Traditional IRA. This is where you are required to pull out a percentage of your assets in these types of accounts by the government. They want their tax money and they don't want to wait forever for it. Depending on how much you have in these accounts, this can cause quite a tax bill for money you would not have pulled out otherwise. You can attempt to do this on your own terms by performing Roth Conversions by moving this money over to a Roth account and paying the tax bill when you do so.  

When are you going to pull social security?

One of the more obvious questions with not a lot of obvious answers. Here are some factors to consider:

Your health - if you have underlying health concerns or a family history of premature death, it may make sense to begin pulling benefits sooner.
Your income needs - when you
If you are married, make a plan with your spouse in mind - if you are married it can be strategic to think about who pulls their social security first. For example, let's consider a scenario where husband is older than his wife and has a higher benefit than his wife. It can make sense for the husband to wait to pull his social security later on to guarantee a higher benefit and ensure his wife gets his higher benefit long after he is deceased. 
Tax impact - if you are working or have other sources of income, you may have to pay taxes on up to 75% of your social security benefits.
If you sign up for an account at you can run a free report to see what your estimated benefits are. 

Do you have a legacy plan?

This step ensures you have a plan for your assets when you pass away. It is hard to stress the importance of this not only in regards to ensuring your assets pass on in the way you would like but to also avoid the hassle of your family having to navigate the probate process (the judicial process where a will is approved in court.) Here are some documents that are helpful. 

Last Will and Testament - lets you state what you want to happen to your assets when you die
Power of Attorney - who you give authority to make decisions on your behalf if you are no longer able to do so. 
Advance Medical or Healthcare Directive (medical power of attorney) - who you give authority to make medical decisions on your behalf if you can't do so. 
Living Will - instructions to medical providers on what treatment you want or do not want. 
Even with a these documents, your assets will still have to go through the probate process with the exception of life insurance benefits and retirement accounts. If you have beneficiaries set up for these, they will bypass the probate process. 

A trust, if set up correctly, will help to bypass the probate process. A trust is a sort of entity that is set up to hold your assets and is set up through a trust document. You designate a trustee to oversee the trust so be sure this person is trusteeworthy (not my best joke, I admit). 

Are you mentally ready?

Us humans can have a hard time understanding what will make us happy. The reality of situations can fail to live up to the dream-like images in our head. I hate to tell you this, but retirement can be like this for some people. Don't get me wrong, the transition for some is without issues. Others can struggle a bit with the newfound freedom. 

The first few months are likely to be a "honeymoon phase" for nearly everyone as the lack of conference calls, emergency emails, or rude customers leaves you content. Eventually, you can begin to question what your new purpose is.

I once asked a mentor, who was a college professor, when he was going to retire. He responded, "I am not going to retire. Everyone I know that retires old dies." He died at 81 years old still working.  His point (I think) was that people can lose a sense of purpose when they retire and become less driven which can lead to their demise. While I am not trying to infer death is a likely outcome after you stop working, I am saying you may need a plan to remain active and driven. Helping family, volunteering, getting a part-time job, or spending more time with friends. Having so many options in retirement can be great. It can also be paralyzing.

The main point here is that when to retire can be just as much a psychological decision as it is financial. Talking with your family and a financial professional can help come up with a plan for the golden years. I hope I haven't given the impression I think retirement is a downer. Quite the opposite, actually. I think it can be the greatest time in our lives. Like trying to figure out how to save room for dessert, it just takes a bit of planning.