Moving from an active member of the workforce to retiree is a major life change that not only involves decades of financial preparation but also emotional and logistical considerations.
How do you know when you’re ready to say goodbye to the daily grind? Here are some benchmarks and questions to consider.
1. You have the financial resources to retire
Financial preparedness is the first and most important measure for determining whether you’re ready to retire.
“It’s the number one sign you’re ready to retire, by a long shot,” said Kurt Hemry, president of Ironwood Wealth Consultants. “(You must) have adequate, guaranteed, lifetime income to support you throughout your retirement years.”
Retirement savings can come from pensions, 401(k)s or other retirement savings accounts, but it should not come entirely from stock market investments due to market volatility, said Hemry.
2. You have a comprehensive plan
Have you carefully planned for all financial considerations in retirement? It should include more than just your savings.
“It should take into account when you should claim Social Security, how much you can withdraw and from which accounts, how you will pay for healthcare expenses and the impact of inflation and taxes on your nest egg,” said Tony Drake, certified financial planner and founder of Drake & Associates.
The plan should also factor in current spending and how that will change in retirement, including estimated costs of things like travel and entertainment. Your entire financial picture must be methodically mapped out before taking the plunge. We have a guide here to help you get started.
3. Your health care is accounted for
Healthcare is one of the primary expenses and burdens as you age, said Ben Watson, certified public accountant and CFO of DollarSprout.com. It’s essential to do your research to make sure you’re covered.
“Before taking the leap into retirement, talk to a financial advisor or your human resources department to see what health care options you have in front of you,” he said. “Every person’s situation is unique, but there are ways to make sure you’re covered.”
4. You are debt free
Eliminating debt frees up your cash flow for current and future expenses. Credit cards and car payments will only hinder you in retirement, especially as you step away from a steady paycheck.
“Retiring with debt is like setting sail with the anchor still in the water, it drags behind you and slows your momentum,” said Watson. “If you’re retiring on a fixed income you want to use your cash flow to its full potential without any hindrances.”
5. You are mentally ready to stop working
If work-related stress is impacting your quality of life, consider planning your departure date, said Misty Lynch, a behavioral financial advisor and certified financial planner at Twine.
“Years ago, I worked with a man who kept track of the days until retirement on a desk calendar,” she said. “He wanted everyone to know how miserable it was for him to be there. If this sounds like you it would be worth thinking about planning your exit strategy.”
Have a game plan outlining what your life will look like once work is no longer occupying your days. This could include turning your side hobby into a part-time job.
“Many people ease into retirement by reducing hours, grooming their replacements or spending time pursuing a passion they’ve had on the back burner,” said Watson. “Not only could this be an additional source of income in retirement, but it could give you a new routine to experience life.”
Can your retirement pass a stress test?
Exiting the workforce is never purely a financial question, but you really don’t want to retire until you are financially able. Before retiring ask yourself if your retirement plan pass a financial stress test.
Stresses include things like the loss of your Social Security or pension, a sudden death, an unexpected need for long-term care or a significant increase in taxes, said Hemry.
If you’ve run through these scenarios and think your retirement plan would succeed, you may be ready to retire,” he said.
Don’t think you have enough saved for retirement? Here’s how to catch up.
Image: Vlad Sargu