The decision to retire will have a profound effect on how you spend your time and where your money comes from. Before giving up a salary, make sure that you are in good financial shape and that you will not regret your decision to retire.
Following these four steps can help confirm that you are ready and can give you a good idea of what life will really be like for you as a retiree.
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1. Decide on a safe withdrawal rate
Deciding on a safe withdrawal rate is one of the most crucial steps before retirement. Your withdrawal rate determines how much income you will get from your savings and whether you run out of money in retirement.
Traditionally, many retirees followed the 4% rule. This allowed a 4% withdrawal from your account balance in the first year. Each year you would adjust the amount for inflation. Unfortunately, this strategy can now put you at risk of running out of money, as the lifespan has lengthened and the projections of future returns have changed.
There are a number of other approaches, including using the minimum required distribution tables prepared by the IRS to set a withdrawal rate. Pick one before you retire and estimate how much income your nest egg will provide to make sure it’s enough.
2. Set a budget
It is not only important to know how much income you will receive as a retiree, but also how much you will spend.
As you approach retirement, come up with a sample budget that takes into account all of your fixed and discretionary costs. Don’t forget things like travel if you plan to enjoy your retirement discovering the world.
Compare your budgeted expenses with the amount of income you will get from your nest egg and social security. If you fail, you may want to make a few changes before you retire, or you may need to work longer to save more and allow a delayed Social Security claim to earn bigger monthly checks.
3. Research tax rules
Understanding how your retirement income will be taxed, including your Social Security benefits, retirement income, and distributions from your retirement accounts, is essential.
The rules differ depending on your state, but the federal government begins to tax Social Security benefits once the interim income reaches $ 25,000 for single filers or $ 32,000 for married spousal filers. Provisional income is half of your Social Security checks plus all taxable income and some non-taxable income.
Be sure to check your state’s tax rules as well as IRS requirements to prepare for what your pre-tax income will look like as a retiree.
4. Check your insurance coverage
Finally, you’ll need to make a plan to get comprehensive insurance coverage, especially since health care is one of the biggest expenses retirees face.
This is especially important if you retire before Medicare goes into effect at age 65, as you may need to stay on an employer’s plan through COBRA or purchase independent insurance. But even if you are already Medicare eligible, you may want a Medigap or Medicare Advantage plan to provide broader coverage. You will want to know how much it is likely to cost you and what your personal expenses might be.
By budgeting, assessing your sources of income, and determining the effect of taxes and health care on your retirement income, you can make an informed decision about whether you are truly able to support yourself without employment for the rest of your life.
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