If you’re nearing retirement age and feeling woefully underprepared, don’t worry – you’re not alone. As they head into their 50s or 60s, it’s quite common for people to wonder if they’ve made all the right financial decisions now that retirement seems to be looming just over the horizon. Whether you’ve been stockpiling cash or you’ve been banking on Social Security and a part-time job, here are the answers to your most common retirement questions, along with our answers.
1. When should you retire?
Unfortunately, there’s no easy answer when it comes to this question. The age of retirement varies from one person to the next, and it depends on a lot of personal factors. For example, some people retire at a very young age – as early as their 30s, for example – due to health reasons or because they’ve simply saved up enough cash to do so comfortably. Still, there are some guidelines that may help you make the decision. Consider the following:
- Are you ready to stop working? For many people, work is always just that and nothing more. For others, however, work is part of their identity, and they can’t honestly live happily without it. You’ll need to do a bit of soul-searching to decide this one for yourself.
- Do you have a viable retirement budget prepared? Do you know how much retirement will cost, and are you prepared to live on that amount?
- Do you carry any debt? Most advisers recommend a debt-free lifestyle before retirement, though there are always exceptions (a mortgage is arguably the most common exception).
- Do you have the necessary funds? Obviously, the most common obstacle to retirement is a lack of financial security. You’ll need to make sure that your savings and investments will cover your retirement budget. This will require significant calculations, such as your life expectancy in years as well as the interest on your investments.
- Average retirement is between 65 and 75. If you’re still wondering, it’s worth noting that most people retire between ages 65 and 75. By 66, roughly two-thirds of the U.S. workforce no longer work full-time. That number reaches 89 percent by age 75.
2. Will Social Security be enough for retirement?
This is a difficult question to answer because it varies from one person to the next, but the most likely answer is "no." Still, that doesn’t mean you should give up hope of retiring if you haven’t saved a penny. You likely still have time to save, and many people opt to work part-time to supplement their Social Security income. The starting rate for Social Security is usually about the same as the income you would have from a minimum wage full-time job. For most people, that isn’t enough to retire. It’s estimated that Social Security will be roughly 30 to 40 percent of all retirement income for retirees with a modest lifestyle.
3. When should you start drawing Social Security?
Again, the answer to this question varies. If you draw Social Security sooner rather than later, you’ll likely receive less income each month. Still, most people choose to take this option because they assume more income now is better than more income later. For many, this is a mistake, but it depends entirely on the big picture for your retirement. For example, how much do you have invested in other assets? Are you planning to work part-time? Etc.
4. Will you need health insurance in retirement?
You will certainly need some type of healthcare coverage in retirement, but you may qualify for Medicare. If you’re generally healthy, Medicare alone may be enough to cover the majority of your expenses in case of an emergency. If you have ongoing health conditions or tend to get sick often, however, you’ll likely want supplemental insurance to cover your needs.
5. Should you pay for your child’s college before you save for retirement?
College is an expensive cost that is considered a necessity by many. If you failed to save for your child’s retirement while you were in your 30s or 40s, you could be facing this dilemma later: Should you pay for your child’s college now or start saving aggressively for retirement? While it’s a difficult decision to make, most financial advisors recommend saving for retirement before college.
This is standard advice, even for younger adults. The closer you are to retirement, of course, the more you should consider saving. Your child can find other ways to pay for college (loans, employment, etc.), and you certainly don’t want to fall into the trap of preventing your own retirement due to lack of funds.
6. Is an annuity a good investment?
For many people, an annuity is a wise investment. These insurance products serve as a means to protect your income, essentially guaranteeing a minimum income for the rest of your life. However, many retirees are planning to use only guaranteed income during retirement anyway – Social Security or pensions, for example. In these cases, an annuity is unnecessary. It’s best to speak to a financial adviser to decide whether an annuity is best in your situation.
7. Should you take the lump sum option for your pension?
It’s common for employers to offer a lump sum option versus an annuity for pension plans. It may be tempting to take the offer of a lump sum, but it’s usually wiser financially to take the annuity option instead.
As with most of the answers mentioned above, it’s always best to discuss your options with a financial adviser. Each person’s overall financial situation is vastly different from the next, and an adviser can guide you to the best choices for your own retirement.
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