5 Questions To Answer Before Retiring in 2023
Retirement planning is not just about cash flow. While understanding your income sources and how your expenses will change is necessary and important, determining your retirement lifestyle is just as essential. If you are one of the millions of Americans who plan to retire in 2023, here are some crucial things to consider before giving notice to your employer.
What Will My Lifestyle Look Like?
Retiring is not the same for everyone. Some will choose to scale back working for the same company or consulting in their field of expertise. Others will turn their long-time hobbies into full-time ventures. While many will stop working altogether to spend more time on activities they've always needed more time to do before. If you decide to leave the workforce voluntarily, make sure it is to do something extraordinary. Dictionary.com defines the word retire as "to withdraw from one's career, usually because of age" and "to withdraw, or go away or apart." Unless you enjoy solitude, planning for social engagement is essential. Just because you reached a certain age does not mean you are ready to mentally or financially stop working. Your retirement will be much more fulfilling if you decide in advance how you want to occupy your days.
How Will I Cover My Expenses?
According to a 2022 Schwab 401(k) Study, the average 401(k) participant believes they need to have $1.7 million saved for retirement. But, in reality, the amount you need for retirement depends on your spending, and that amount varies widely and is largely in your control. World Population Review ranks states based on the average retirement income needed by state. For instance, Indiana is listed as the 9th least expensive state to retire, where residents will need an average annual retirement income of $56,064 to cover their yearly expenses and taxes. Using these numbers, you can Test out the CFO Center to see if you will have enough. Let's say you are 64 years old, and your current salary is $80,000. You decide that $56,000 (70% of $80,000) is sufficient to cover your retirement expenses. Do you have enough to retire? That depends.
Beyond your retirement savings (401(k), IRA, etc.), what other sources of income will you rely upon to cover the $56,000 (pension, social security, trust, etc.)? To get an estimate on your Social Security benefits, visit www.ssa.gov.
When Will I Take Social Security?
For those who plan to live a long life, consider delaying your claim past your Full Retirement Age (FRA). Each month you wait, you will benefit from an increase for 40 months of delayed retirement. So if you turned 64 on December 1, 2022, and want to retire on December 1, 2023 (19 months before you reach your normal retirement age), the Social Security Administration will reduce your benefit to 89.44% of the FRA amount. Whereas if you waited until December 2028 to receive your first Social Security check, your benefit would be 126.67% of the FRA amount.
Use the Social Security calculator (ssa.gov/oact/quickcalc/early_late.html) to compute the effect of your early or delayed retirement benefits.
What About Medical Insurance?
If you retire before age 65, you may need to use the Health Insurance Marketplace to purchase a plan. To understand what those costs might be, visit healthcare.gov or talk to an insurance professional. Some retirees, especially those under age 65, choose to work part-time if only to provide medical benefits.
Should I Pay Off Debt First?
The burden of loans can weigh heavily in retirement, so plan to pay down large bills as soon as possible. Avoid taking on new debt that could carry over into retirement. Among older households in the United States, the Bureau of Labor Statistics reports that the greatest expense remains housing, accounting for 32.4% of those aged 65-74 and 36.5% of Americans aged 75 and older. If your mortgage is not paid off, you may consider downsizing to a smaller home or moving to a more affordable area.
Planning for retirement is exciting, but the uncertainty of unknown variables can cause anxiety without proper planning. The team at Hurlow Wealth Management is here to help. For nearly two decades, we have helped clients find clarity, feel confident, and achieve comfort in retirement. Schedule a FREE consultation today.