There are several considerations to make when one is considering retirement from the government. While you may have been consistently contributing to your retirement fund over the years, perhaps the recent economic downturn or receiving fewer hours at your current job have made you wonder when the right time to retire might be.
Here are some questions to ask before making such an important decision:
1) Do you want to retire yet?
As much as retirement is a financial decision, it is also an emotional one. What is it that you wish to do if you did not have to work at your current position? Do you still feel a drive to go to work every day? Would you miss your job if it were gone tomorrow?
2) What is your definition of retirement?
Retirement can mean different things to different people. If you are emotionally prepared for retirement, consider what sort of lifestyle you wish to live after retirement. From there, you can determine how much money you will need to put away in order to afford a certain standard of living once you retire. Traveling frequently will, of course, require greater savings than if you plan to stay close to home to spend time with family or if you intend to downsize to a smaller home.
3) What income level will you need to retire?
After deciding on the lifestyle that you hope to live, it is then time to sit down and figure out how much money you will need to retire. Looking at the numbers on paper will bring you back to reality and will enable you to plan effectively for a satisfactory retirement.
According to financial planners, people need roughly 80% of the income they received while working in order to have a good standard of living once retired. Why only 80%? Consider that you will not be saving up for retirement as you once had been. In addition, the percentage of your wages that you were contributing to taxes will also no longer be a factor. You will no longer need to drive to work every day nor will you likely be spending as much money on food.
That being said, you might find that you will spend more on healthcare, travel, or long term care insurance.
The best thing to do is to create a worksheet that compares your current expenses with your estimated expenses after retirement to help you formulate an effective plan.
4) What will your income be after retirement?
- Pension: You are part of a shrinking number of people in the workforce if you have a defined benefit pension from your present or past employer. You can ask them for a projection of that pension so that you can better expect what sort of income you can plan on.
Once it is time for you to collect your pension, be sure to choose a payout option that covers your spouse or any dependents in the event that you pass away. It is also wise to consider opting for a cost of living adjustment if it is available. This will prevent inflation from reducing the value of your pension over time.
- Social Security: You can obtain an estimate of your benefits based on your actual earnings record from the Social Security website. You can decide when you want to begin collecting those benefits. You may choose to take it as early as age 62, but it would be best to postpone it until later if you can afford to do so. This is especially true if you are healthy and predict that you will live longer than other people your age.
The reason why it would pay to wait is because your monthly benefit will grow by around 8% for every year that you delay to collect on it until it maxes out just after age 70. You can also apply for a spousal benefit if you are married and wait until you are full retirement age. You can allow your benefit to increase and then collect on it later.
If you choose to take advantage of your benefit before full retirement age, you will receive only the higher of either your spousal benefit or your reduced benefit. You cannot go back on your decision, so it is very important that you choose carefully.
- Additional Income Sources: Consider any other income sources such as rental income or an annuity. There is also an opportunity to work part time or make one of your hobbies into a business.
5) What do you have saved for retirement?
This is the time where you should add up all of your retirement accounts or other investments so you have an idea of what your supplementary income will be. The plan is to make this money last as long as you plan to. This way, you can better plan for what you will be investing your savings in upon retiring.
6) How long will your savings last?
Once you determine your expenses, income, and savings, you can enter them into a spreadsheet in order to see how long they will really last. There are retirement-specific calculators you can use as well, so that you can determine factors like net income or you can predict how inflation will affect your savings.
It is always better to plan on the side of caution. Avoid the risk of outliving your money by ensuring that you would run out before you turn 95 or even 100, in some cases.
If your plan falls short of what you want, there is always the option to earn additional income after retirement as mentioned earlier by taking up a part time job or starting a small business. Cutting back on expenses is also a safe option, in addition to pursuing a more aggressive investment option.
Always keep in mind that even the healthiest people will not be able to work forever. Also, investing carries a degree of risk, so it is always safest to cut back on expenses when planning how long your savings will last you after retiring.