Have you ever wondered how a person can determine in they are financially prepared to retire? Is there a standardized retirement readiness test you can take? Is there a retirement money report card that you receive? How about a checklist of retirement readiness factors?
Retirement Readiness Checklist
I’ve thought quite a bit about the topic of being financially prepared to retire. In our case, some of our retirement will be funded by Social Security but most of it will be self-funded. Here are some of the items on my “prepared to retire” checklist:
1. Having Sources of Guaranteed Income. I can’t see myself fully retiring until I have enough guaranteed income streams available to pay for our basic necessities of retirement living. For us having no pensions, this means a combination of Social Security and our guaranteed retirement income plan. Others may choose a life annuity to provide some guaranteed retirement income.
2. Health Care is Covered. If retirement is post-age 65, this means being eligible for Medicare and having the resources to cover what Medicare doesn’t: premiums, deductibles, and co-pays. Health care costs in retirement are significant, with or without Medicare, so you must be prepared for them.
3. Adequate Liquid Assets. I don’t think it is safe to retire on fixed income streams alone. There are obvious reasons for this, including being able to handle those extraordinary expenses like a new roof or replacement vehicle. Moreover, even if you have investments in a retirement plan such as a 401(k) or IRA, being forced by financial need to sell them in a down market is not good for the longevity of your plan. It can also be disruptive to your tax planning in retirement. This is why having a retirement emergency fund is so helpful.
4. A Retirement Income Distribution Plan. If you are like us and will use your own investments for generating retirement income, you need a plan for how to generate that income and when and how to make distributions from the various parts of your retirement nest egg. There are rules of thumb for this, but many of them are rules of “dumb.” I have written about my preferred method of calculating how much you will need in retirement, and using that calculation for creating your retirement income plan.
5. Have a Back-Up Plan. This relates to factors 1 and 4 above: What will you do if something ruins your Plan A, such as poor health, runaway inflation, or market crash? For some, Plan B may be returning to the workforce, i.e., “unretiring.” I don’t like that as a back-up plan. Instead, I recommend preparing a “worst-case scenario” budget and assessing whether your guaranteed income streams will cover it. Your back-up plan may also include purchasing long term care insurance and having adequate inflation protected assets in your retirement portfolio. Pre-retirement risk assessment is critical so that you protect yourself and your spouse against known risks.
Final Thoughts on Determining if You Are Financially Prepared to Retire
Some boomers use financial advisors and may be expecting their advisor to tell them when they are ready. That’s fine but I would still have my own readiness checklist to review with the advisor. Every retirement plan is personal and unique. Unfortunately, some so-called financial advisors use more of a cookie-cutter approach to planning.
Finally, you will note that my proposed checklist covers only financial aspects of retirement readiness. There are plenty of other issues to consider, including your emotional readiness.
So do any of you have a retirement readiness checklist?