Can I afford to retire?
Most of us are looking forward to retirement. But the transition can be filled with challenging financial questions – questions for which you may not have all the answers.
For years, when thinking of retirement, the mantra has been, “Save, save, save.” Paying down or eliminating debt is also important. But as retirement time draws closer, you should ask yourself if your nest egg is big enough to retire at the desired time, how much you would be able to spend if you do retire, and whether you should convert some of your savings into an annuity.
For many Americans about to retire, having enough money to maintain living standards has become more difficult. According to The Center for Retirement Research, the national retirement risk index shows that 45 percent of Americans are on track to fall short, by 10 percent or more, of the goal of replacing about 3/4 of their pre-retirement income after retirement.
The reasons for this trend are that people are living longer, outliving their savings; there are fewer guaranteed pensions; low rates of personal savings; and the cost of health care is ever rising. These trends make it difficult to build savings for retirement, and create uncertainty about when retirement can occur.
Before jumping into the deep end of the retirement pool, take a look at your spending habits, and think about how well your retirement income will cover those expenses. Is your mortgage paid off? What are your costs for real estate taxes? What about maintenance on your home? How much are you planning to spend on “extra” things like gifts for children and grandchildren?
Many Americans plan to retire at 65, but in some cases, it is wiser to wait a few years. You can collect full Social Security benefits at age 67, and will thus have fewer years to fund in retirement, if you retire later.
Financial experts agree that you should draw no more than 4 percent of your financial assets during your first year of retirement. After that, the amount can increase with the rate of inflation. Sticking with 4 percent generally gives people enough to live on and ensures that their retirement will last as long as they live.
Social Security is the most reliable income for most retirees. But many supplement that with savings from a variety of other sources. That may include a mix of stock or stock mutual funds and fixed income instruments. Using a chunk of your nest egg to buy a fixed annuity can guarantee a stream of income for life and can provide a measure of certainty in an overall plan. But experts caution that it’s good to wait until you’ve been retired for a period of time first, in order to monitor your income and expenses.
Your home is a major portion of your wealth. Downsizing to a smaller residence in retirement can provide additional funds for retirees. If finances become tight, a reverse mortgage can provide homeowners with steady income in exchange for declining equity in the home.
Retirement involves more than just money. It also involves living your dreams of traveling, spending time with family and doing the things you never had time for while working. And starting with a solid financial plan can help make your retirement dreams come true.