Are You Ready to Retire? 5 Questions to Ask Yourself
Whether your Scottsdale or Phoenix retirement is just around the corner or it is still years away, it is worthwhile to begin planning for the day you leave your full-time career.
There are many more pieces at play when you make your retirement decision than just ensuring your financial security.
Here are five questions to ask yourself to fully consider the complexities of making the life-changing decision of when and how to retire.
1) What Are My Retirement Age Options?
You can of course retire at any age, but you may need to wait before you are eligible for certain government and tax benefits. Once you turn 59½, you can begin making penalty-free withdrawals from qualified tax-deferred retirement accounts, such as 401(k)s, IRAs, and annuities.
You can begin collecting early, reduced Social Security benefits as early as age 62. However, your full retirement age will be 66 or 67, depending on your year of birth. You must reach this age to qualify to receive the monthly Social Security benefits you were originally promised.
If you work while also collecting Social Security before you reach full retirement age, your benefits will be reduced above a relatively low earned income threshold. However, once you reach full retirement age, you can work as much as you would like while also receiving Social Security benefits.
For those expecting to have a longer life expectancy than average or who have the financial resources to delay, deferring Social Security benefits for several years can be advantageous. The annual benefit amount you are entitled to receive rises by 8% for each year that payments are deferred. At age 70, there is no further benefit to deferring payments.
Medicare coverage starts at age 65, so anyone retiring earlier must arrange other health insurance until then. You may be able to qualify under your spouse’s insurance or through your former employer’s health insurance. If not, you will need to purchase a private health insurance plan until you qualify for Medicare.
2) Am I Financially Ready to Retire?
Before you consider retiring, you should be debt-free, including credit card bills and mortgages. You do not want to risk having to pay off large loan balances during your retirement years, when it would be difficult to find work again to increase your income.
Many companies offer 401(k) matching policies as an employee benefit, so make sure you are contributing at least the amount that will earn a full employer match.
Another way to think about your savings goals is to plan to save 25 times your desired annual spending amount (which allows for complete replenishment if your portfolio returns at least 4% annually).
If your dream is to retire in Phoenix or Scottsdale, AZ, finding a local financial advisor can help you more accurately project the amount of savings you will need to meet your retirement spending goals as well as build a conservative, low-volatility investment portfolio that will keep pace with inflation and ensure that your net worth will be protected for the rest of your life.
3) What Will My Actual Post-Retirement Living Expenses Be?
Many people do not accurately predict their post-retirement spending levels, often underestimating their spending. A general guideline is to assume that your cost of living upon retiring will be about 80% of your pre-retirement income. However, some retirees’ living costs increase after they retire, since they might have the time now to pursue expensive hobbies, dine out, or travel.
When you are building your budget, create line items for each projected expense, estimating how much you expect to spend on each item monthly.
To err on the side of caution, you can increase your total projected spending needs by 10-20% in order to develop an annual spending goal that includes a buffer if expenses are higher than anticipated.
4) What Retirement Tax Implications Apply to Me?
There are several important income tax considerations when making retirement plan withdrawals and receiving Social Security benefits.
A financial planner in Scottsdale can help advise clients on retirement plans specific to Arizona, as well as provide their clients an estimate of their expected effective annual tax rate to add as a projected expense to their budgets.
Almost all your income, unless it comes from Roth IRAs or Roth 401(k)s, which you already paid taxes on, will be subject to income tax, and you will report the withdrawal amount on your personal tax return the year you received the funds. Social Security income, withdrawals from all pre-tax retirement plans, such as Traditional IRAs and 401(k)s, bond income, and annuity payments are also taxable as earned income. The only major exception comes from gains from buying and selling securities, which are taxed at the lower capital gains tax rate if they are held in your account for over a year.
Further, 10% early withdrawal penalties apply if you withdraw funds from an IRA or 401(k) before you are 59½ (unless you use the funds for an allowed exception, such as paying medical bills). If you do not qualify for an exception, you will owe a flat 10% fee on the withdrawn amount, and then the remaining withdrawal will be taxed at the normal income tax rate.
5) Am I Making a Well-Informed Retirement Decision?
People often focus on retirement as an end goal to be accomplished as quickly as possible. There are so many outdoor activities in and around the Greater Phoenix area, it is tempting to want to retire to this beautiful area sooner than you should!
But, if you are still enjoying and capable of performing your job, you do not need to conform to anyone else’s retirement expectations. Average retirement ages have risen over time, and there is no need to end a fulfilling life experience in your career just because you have reached a certain age milestone. You will know when the time feels right to retire.
Further, plan for how you will spend your time once you do retire, at whatever age that might be. Retirees often realize that feeling productive and purposeful is necessary for them to enjoy their retirement years.
Consider your options if you do decide to find a worthwhile time commitment. Many retirees enjoy working part-time, in a more fulfilling job than their previous one, or as volunteers for non-profit causes. Or take up outdoor activities, such as golf.
Retirement is one of the most life-changing events most of us will experience in our lives. Many aspects of your financial situation should factor into your retirement planning approach and your personal retirement goals.
ARQ Wealth Advisors can make sure you are on the right path for a financially successful retirement. Our financial planning is designed to help make your dreams become reality.
Contact us today for a complimentary financial review to find out if we are the right firm to help with your retirement planning!