Financial Readiness for Retirement – Are YOU Ready?

Are you ready for retirement? You may hear this question often as you enter your late 50’s and early 60’s. It is a loaded question with many elements to consider: the conclusion of your career; where/how you will live; your emotional readiness to face this milestone; your health status; changes in family dynamics and work social connections; opportunity for more leisure time and travel; and last but not least, financial readiness. This blog focuses on financial readiness and how you can be financially better prepared to retire.

As you may have heard through the media, many people are NOT financially prepared for retirement and face a shortfall in funds. If you have not saved adequately the past few decades and are relying social Security benefits to cover retirement living expenses, your standard of living will likely be lower than today while you are still working. Even with retirement savings, the majority of people simply have not saved enough for a variety of reasons: crushing college expenses; inflation and high cost of living; too much debt; financial setbacks due to job loss or divorce; unexpected expenses for a health crisis; etc. Some expect their children to support them. Others plan to keep working well into their 70’s and beyond. Many are relying on their investment portfolios – which may or may not provide sufficient long-term returns. Unfortunately, these expectations may not be realized.

There is no “one size fits all” solution to get ready for retirement. Instead, the best approach is to employ a variety of strategies to provide resources for the retirement lifestyle that fits your goals and reduces anxiety about running out of money. As you begin thinking about your financial readiness for retirement, do the following:

· Review your investments.

· Create a retirement budget and discover ways to spend less.

· Save more for retirement starting today.

· Pay off as much debt as possible.

· Understand your Social Security options.

· Prepare for retirement health care expenses.

· Work longer.

· Decide where to live and activities you will enjoy.

Review Your Investments

Review your savings, investments, and retirement accounts to determine if you will have enough funds to support your household in the years to come, recognizing that you may live for thirty or more years in retirement. Hiring a financial advisor to help with this review can be beneficial. Questions to consider:

· How are your investments allocated between cash, stocks/equity, and bonds/fixed income?

· Are you comfortable with the level of risk in your current asset allocation?

· Do you need to adjust these allocations?

· What is the long-term performance and overall cost of your investments?

· How will you access funds in retirement in a tax efficient way? Consider:

o You may be a different tax bracket in retirement.

o Withdrawals from pre-tax retirement accounts are treated as fully taxable.

o You must take Required Minimum Distributions (at age 73 or 75, depending on birth year).

Create A Retirement Budget and Discover Ways to Spend Less

Many people expect reduced living expenses in retirement - but studies have shown this may not be reality. New expenses may be added, such as travel; higher healthcare costs; club memberships; supporting children and/or grandchildren; a second home; and paying for expenses previously subsidized by your employer. Include cost reductions, such as lower commuting/parking costs, reduction in work attire, etc. Consider downsizing to a cheaper home or moving to a less expensive location, and relying on only one car instead of two.

Save More for Retirement Starting Today

You may not realize you could save more by maximizing your retirement savings. If you have an employer 401(k) plan or 403(b) plan, check the maximum you can contribute annually. Many employees only save the minimum amount to receive an employer match. In 2024, you can set aside up to $23,000 ($30,500 if you are 50 or older) in a 401(k); and $7,000 ($8,000 if age 50 or older) in an IRA. If self-employed, explore the various retirement plan options for small businesses. Save as much as possible before retiring, especially if college expenses and home purchases are now complete.

Pay Off as Much Debt as Possible

Determine if you can pay off all, or most of your debt, before you retire. This includes mortgage loans, home equity lines of credit, credit cards, auto loans and student loans. This will reduce your financial obligations in retirement and provide more cash flow to support your retirement lifestyle.

Understand your Social Security Options

You can apply for retirement benefits up to four months before you want to start receiving benefits. Consider delaying the start date for Social Security – if you do not need the funds right away or plan to work past age 62 or 67. There is no “best” date for everyone to start Social Security benefits – it all depends on your individual financial situation.

Determine your full retirement age (FRA) which is typically between 66 and 67. If you apply for Social Security benefits when you reach your FRA, you’ll get your “full benefit” amount. You can begin to receive Social Security benefits as early as age 62, but your benefit will be permanently reduced. If you delay benefits past your full retirement age (up to age 70) you will get a higher benefit depending on your age at inception of benefits. You may also qualify for a higher benefit through a spousal benefit, even if divorced (and were married for at least 10 years).

Prepare for Retirement Health Care Expenses

You are eligible for Medicare at age 65, and can sign up three months before your 65th birthday. Review the options for supplemental coverage (‘Medigap” plans and Medicare Advantage plans) as well as prescription drug plans (Medicare Part D). If you have group health care coverage past age 65 through an employer health plan, you should still enroll in Medicare Part A when you turn 65. Otherwise, you will be penalized with higher premiums the rest of your life.

If you retire before age 65, explore other options for health care: coverage through a spouse’s plan; COBRA coverage through your employer (usually costly); or using your state’s health care exchange. If you own a Health Savings Account (HSA), maximize your contributions until you retire. These funds will be available for future health care needs.

Work Longer

If you can AND want to work longer, take advantage by saving more during these final years with tax-deferred compounding, drawing down your portfolio over fewer years, and delaying your filing date for Social Security benefits. Working longer can be full-time or part-time. This is not always an option, depending on your employer, industry, and your health. But even a part time job for several years can boost your cash flow and improve your overall financial health.

Decide Where to Live and Activities You Will Enjoy

Downsizing could lower your housing costs. If you sell your current home, you can buy another lower cost home with the proceeds. Many opt for condos or over-55 communities to reduce/ simplify home maintenance tasks (yardwork, snow plowing, etc.) which are outsourced. If you live in a high-cost area, consider moving to a state with less expensive housing and taxes.

Moving to a retirement community can help you make new connections, and some retirees move closer to family members. Staying active can help improve your overall well-being. Retirement is a time of enjoyment and reflection, but it can also be lonely. Try to schedule some form of social engagement at least weekly. Try new hobbies and activities that you never had time for while working - or volunteer in your local community.

Planning for retirement is a deliberate process which requires careful thinking, analysis, and reflection. Be sure your goals for retirement living are consistent with your ability to financially support your lifestyle.

If you are not currently working with FPS, we would be happy to talk with you. Questions? We are here to help.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA

Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.