Stepping away from a long-term career is a complicated decision that will impact your finances for the rest of your life. The process of getting ready to retire takes several years, but the payoff can be a painless, financially flexible retirement for you and your family to enjoy. As you move closer to retirement, consider the different areas of your financial life that need addressing and analysis.
Evaluate Income Sources
Your retirement income is likely to come from a variety of sources. Stock dividends, annuities, pension payments, Social Security benefits and retirement plan distributions can all add to your retirement budget each month. This means that to budget for retirement, you need an accurate idea of how much these sources will pay out, in total. Fixed payments from annuities are relatively easy to calculate. Stock dividends may be stable now, but could decrease or disappear at any time. Pension plans pay at different rates based on your service time and income when you retire. Check into each source of retirement income to determine a total income range that you can expect to earn once you do retire.
Savings and Investments
In addition to income from pensions and Social Security, your savings will provide much of the money you need to weather retirement. In particular, your personal savings will give you a way to pay large, one-time expenses, such as medical bills or home repairs. According to CNBC and Fidelity Investments, to retire at age 67 you should save up around eight times your annual income. This means having one million dollars in your portfolio if your household income is $125,000. Continue saving by looking for new income opportunities and reducing your living expenses as you approach retirement.
Look at your spending patterns and priorities to craft a realistic retirement budget. Because your income will be going down, identify areas for spending less. Some expenses, such as the cost of commuting to work, will automatically decrease. Others, such as insurance if no longer offered by your employer, will go up. Add in the cost of activities you expect to perform in retirement, such as travel. Implement your retirement budget for six months while you're still working to make sure it's reasonable and realistic.
Health Care Costs
Health care costs constitute a major expense in any retirement budget. Even with Medicare eligibility at age 62, you can expect to pay for over-the-counter medications, elective procedures and some preventive care. Employer-sponsored retirement health plans generally split costs between you and your former employer, assuming that the employer remains in business. Look at health plan rates and recent increases when selecting a plan. Paying more now might be a good decision if it means you lock in stable rates or get coverage that won't quickly become unaffordable based on your retirement budget.