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5 Action Items to Complete Before Retiring

2017-03-09 04:49 | Network |

The years leading up to retirement can be a time of both increased excitement and anxiety. For many, retirement offers the possibility of pursuing new opportunities and experiences. However, with this new sense of freedom comes a heightened level of concern about whether your money will last. To create a successful retirement, there is no substitute for thorough planning and informed decision-making.

Start by gathering information on all the different elements that make up retirement from how you hope you'll spend your time to your expenses and your resources. All this information will go into your plan. Make sure you've done everything on this checklist before you actually retire.

1. Define What You Want to Do

After working most of your life, retirement is the time to figure out if there are things you want to do that you'd missed out on earlier in your life. Some people take up new hobbies such as golf or tennis. Many use this time to travel and see the world. Others get deeply involved in volunteer work or take up a new career. If you live up north, you may decide to spend the winter in a warmer climate, either by renting or purchasing a vacation home. Some retirees decide to relocate to another country, at least for the early years of their retirement (see Retirement: U.S. vs. Abroad).

Once you figure out what you want to do during retirement, you need to define, prioritize and quantify your key choices in terms of money. Start by prioritizing your goals from most desirable to least desirable. This should help you determine which goals are more important for you to achieve. Then cost out each goal and see how well it matches your situation. For example, if you want to spend $50,000 a year on travel, but only have $600,000 in total assets, you need to rethink your plans. Once you define and quantify what you want to do in retirement, this is a sign you are mentally ready to retire. It should also help you determine how much extra money beyond monthly living expenses you need to allocate.

2. Budget for Your Living Expenses

One of the most common mistakes retirees make is understating the income they'll need during retirement. The rule used to be that 60% to 80% of your current working income was the amount you should expect to need. But this is not the best way to estimate your retirement expenses, and the number-one reason retirees run out of money is poor budgeting skills.

Here's the better approach: Add up your current expenditures, using your online banking or checkbook records and any other regular payments. Determine your monthly expenses and figure out if they are going to increase, decrease or stay the same during retirement. Many retirees make the mistake of assuming expenses will go down. However, if you decide, for example, to buy a vacation home, this could add an additional monthly mortgage payment – and you'll definitely owe taxes, utilities and general maintenance, plus possible association fees. Extensive, expensive travel could have a similar effect on your finances. Our tutorial Budgeting Basics can help you get started.

Once you establish a retirement budget, factor in that what you will need will grow at an inflationary rate of 3 to 4% per year. Even though this may seem high, it is much better to be conservative over the long run. Overestimating inflation only leads to having more assets left for your heirs instead of risking that you run out of money.

Inflation is one of the biggest risks retirees face during the latter half of their lives, so it is extremely important to plan for it ahead of time. To illustrate the effects of inflation, consider that a $50,000 retirement income stream would need to be worth $67,195 in 10 years. Getting the purchasing power of $50,000 after 20 years would require having $90,305.

Once you've drawn up a budget, it's time to compare it with what you think you'll have for retirement and determine how well the two figures match. But first, don't forget to factor in how paying for medical and dental care changes once you retire.

3. Add in Your Healthcare Options and Costs

“The biggest unforeseen expense that can ruin retirement is healthcare, whether a medical procedure or long-term care, such as home healthcare, assisted living, and nursing-home care,” says Carlos Dias, Jr., a wealth manager and founder of Excel Tax & Wealth Group in the Orlando, Fla., area. Most people assume that when they retire, healthcare is taken care of. After all, once people turn 65, they automatically qualify for Medicare coverage, don't they?

The answer: Not necessarily. You qualify for premium-free Part A coverage if you have worked at least 40 quarters of coverage and have paid the appropriate Medicare payroll tax. You may also qualify if your spouse has worked 40 quarters of coverage. If you do not qualify, the 2016 premium rate for Part A could be as much as $411 a month. This could be an unforeseen expense that cuts into your retirement nest egg.

And Part A is only the beginning (see Medicare 101: Do You Need All 4 Parts?). It is still important to know how Medicare works with your existing physicians and treatments. Many doctors may not take Medicare as a form of payment – so you may need to change physicians or pay much more than you did before. Part B, which helps pay for doctors’ services, outpatient hospital care and medical equipment is usually recommended for most retirees. To enroll, the average retiree pays Medicare Part B premiums of $121.80 a month as of 2016 (those with incomes above $85,000 – $170,000 if married and filing a joint tax return – pay more). At the top, singles with incomes above $214,000 ($428,000 if married and filing jointly) pay $389.80 per month.

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