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Don’t Even Think About Retiring Until You Can Answer These 3 Questions — The Motley Fool



Retirement is an exciting milestone in life, and most people can not wait until they can finally quit their job forever and have the opportunity to live a life of leisure.

But before retiring, there are many questions that must be asked to make sure you are ready for the next stage of life. The last thing you want is to retire before being ready and end up regretting your decision, so the more prepared you are, the happier you will be.

Before retirement is on the horizon, ask yourself these three important questions to make sure you are on the right track.

Man with question marks on his head

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1. How much of your savings can you withdraw each year?

It can be difficult to determine how much you need to save for retirement age, but if you leave your job and then your savings run out after five or ten years and you can not go back to work, you may not be lucky. Before considering retirement, make sure you know how much you can withdraw from your savings so that your money lasts the rest of your life.

One of the easiest ways to do this is to use the 4% rule, which is a guideline that states that if you withdraw 4% of your total savings during the first year of retirement and then adjust your withdrawals each subsequent year to take into account account inflation, Your savings should last around 30 years. So, if you expect to have, say, $ 500,000 saved for when you retire, that means you can withdraw $ 20,000 in the first year of retirement.

If that is not enough to live on, you must work to save more before you retire. To find out exactly what you should aim to save, you can work backwards by multiplying the amount you need each year by 25. Then, for example, if you expect to need around $ 40,000 per year in retirement, multiply that number by 25. get a result of $ 1 million. Then, to verify your work, take 4% of $ 1 million for a response of $ 40,000.

If you are experiencing a shock because of how expensive retirement is, remember that the more you work now to at least get closer to your savings goal, the nicer your retirement will be. And the sooner you calculate how far your savings will go and if you are on the right track, the easier it will be to make adjustments if necessary.

2. How much will you receive in Social Security benefits?

Fortunately, if your savings are not exactly where you want them to be, you will have Social Security benefits as another source of income in retirement. But your benefits are designed to replace only about 40% of your income, so you should not rely on them as your main source of income.

To determine how much money should come from your personal savings to pay for retirement accounts, you must first determine what you will receive in Social Security benefits. To obtain the most accurate estimate, you can verify your account statements online by creating a mySocialSecurity account. This will give you a personalized quote based on your earnings record. Or to get a general idea of ​​what you will receive in benefits, you can also use the online calculator of the Social Security Administration.

Keep in mind that the amount you actually receive will depend on the age you claim. The only way to receive your full benefit amount is to claim at your full retirement age (FRA), and if you request it before (after age 62) or later (up to age 70), you will receive a reduction or Increase in benefits

So, for example, let's say that your FRA is 67 years old and has determined that if you claim at that age, you would be eligible to receive $ 1,500 per month (or $ 18,000 per year) in benefits. You expect to need around $ 40,000 per year in retirement, therefore, by subtracting the $ 18,000 per year you will receive in benefits, that means that $ 22,000 per year should come from your personal savings. However, if you instead claim benefits at age 62, your checks would be reduced by 30%, which would leave you only $ 1,050 per month or $ 12,600 per year. In that case, assuming you would still need $ 40,000 per year to survive, you would have to get $ 27,400 of your own savings each year.

3. How will you cover health costs?

Approximately nine in 10 Americans are already relying on Medicare or plan to rely on Medicare for their retirement health care needs, according to a Nationwide Retirement Institute survey, and three-quarters of seniors do not understand exactly how the program works.

If you are unsure of what you will pay for health insurance or the costs for which you are responsible for your retirement, health care expenses can quickly exhaust your retirement fund. Even with Medicare coverage, you must pay all premiums, deductibles, co-insurance and co-payments. Also, Original Medicare (or Parts A and B) does not cover most routine care or prescription drug coverage, so those are other out-of-pocket costs that you may be responsible for. Instead, you can enroll in a Medicare Advantage plan that provides greater coverage, but you may face higher premiums each month.

It is difficult (if not impossible) to predict what types of health care costs will appear during retirement, but if you retire assuming that the insurance will cover these expenses, you will have an expensive surprise. Make sure you have a rough idea of ​​the costs for which you will be responsible and then include these expenses in your retirement plan. For example, you can reserve a certain amount each month in a health savings account, which provides tax benefits when used for medical expenses. Or you can sign up for long-term care insurance to prepare for the rising costs of nursing home care (which is another expense that Medicare will not cover).

Preparing for retirement is not easy, but the best way to make sure you are ready to retire is to do as much research as possible. The more you know about what retirement will cost and how you will cover those costs, the more pleasant and less stressful your golden years will be.


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