You think it is getting close to pulling the plug on the 9 to 5 job that you have had for longer then you care to think about. You should be bit nervous about not having that regular pay check, the health care benefits and paid vacation. With no paycheck and often little chance of going back to work, you darn well better be sure that you can retire with the lifestyle you want.
There are 5 things you should research and understand before you pull the plug on that job to be confident you are making the right decision.
1-Understand your cash flow and how it will change in retirement.
Most people have a general idea as to what they spend each month but few have the level of detail they should have prior to making the decision to retire. There are several online services that can help track your spending such as mint.com. Some credit card companies and some banks have an annual break down of expenditures that can be very worthwhile. Here is a link to a cash flow format that you may want to use to list your current spending and what it may be in retirement. The level of spending will be different in that: you may eat out less in retirement, clothing expense may be less, vacations may be more and then the big one…health care costs!
2-Verify Health Insurance
If you are planning on retiring prior to 65, when most folks are eligible for Medicare, it is critical to understand the potential costs of private coverage or COBRA coverage from your current employer, before pulling the plug on that job.
There can be big differences between company provided benefits and private coverage. Most folks feel that the biggest difference is cost. One of my clients thinking of retiring knew that he was paying less than $250 a month for the company plan (since the company picked up the biggest chunk of the cost) but was shocked to learn that he would have to pay over $900 a month for less coverage on a private plan than what he had via work. Another factor is that the rate of premium increases has been over 20% a year the past 5 years for private insurance.
Keep in mind that private health insurance does not cover dental or vision that you might have had when working.
3-Verify Social Security benefits
Most folks are aware of the annual statements from Social Security that are mailed out once a year. These statements show the projected retirement benefit from Social Security at age 62, full retirement age (that will be between 66 and 67 depending on the year of birth) and age 70. These estimates are based on you working until that time. In other words, if you retire at 60 your monthly benefit will be lower than what appears on the statement.
Another factor is that the amounts listed on the Statement do not include Medicare part B and Part D premiums that will be withdrawn from the monthly checks which can be more than $150 a month.
4-Verify pension benefits, if you are lucky to have one
Pensions are a thing of the past for the majority of US workers. It seems that the only folks that have pensions are those that work for a Governmental agency, which could be local, State or Federal. Some of these folks have Social Security as well. Teachers often receive a pension but most do not get Social Security.
There are number of things to find out about your pension. The first is what will be the monthly amount at the age you plan to retire. If you are married you may want to consider a joint benefit that means some or all of the pension continues on to your spouse should you die first. This is a critical decision to make since a joint amount will be less than a pension for your life alone. Also find out if there is a cost of living adjustment (CLOA) with the pension. Some do not, which means that if your pension started at $1000 a month it will still be the same amount 25 years later. If on the other hand your pension has a 3% COLA, after 25 years your monthly amount will have grown to over $2030 a month.
5-Verify You Have Adequate Resources to Retire And How Will They Be Managed
There is a long used saying about retirement in that it should be supported like a three-legged stool. One leg is the Social Security, the second is a pension and the third is your investments. Well we know that most do not have a pension, which means that your savings or investments have to pick up more slack.
Do you know how much risk is in your portfolio? How much can you withdraw and not risk running out of funds in your later years? What is the first year safe withdrawal amount based on the current valuation? Will that be large enough to support your retirement? Is the portfolio adequately diversified? How often will the portfolio be reviewed or rebalanced? Who and how will the individual holdings be reviewed, analyzed and removed or replaced over time? All the asset allocation need to be changed over time?
Needless to say there is much data to be collected and reviewed prior to making the decision as to if you can afford to retire or not. It often makes sense to have a second pair of eyes review your data and provide an objective opinion as to if retirement is possible at this time or if it may be prudent to work longer.
If you want an objective opinion you should find a Certified Financial Planner® that does not sell products such as annuities, Investments or Insurance. To find such an advisor you can Google “Certified Financial Planner” Fiduciary” “your city”. By using quotations you will get a better out come. The alternative is to search for such an advisor that is a member of Garrett Planning Network or the National Association of Personal Financial Advisors (NAPFA).