Whether you are approaching retirement or have just started thinking about it, knowing how much money you'll need to live comfortably is a big step toward developing a solid retirement plan. But simply having a nest egg doesn't mean you're fully prepared: There's a lot more to retirement planning than socking away funds each from each paycheck, says Derek DeGuire, a financial advisor and certified financial planner with SunTrust Investment Services, Inc., in Tennessee.
To find out if you're ready for retirement, DeGuire suggests asking yourself the following questions:
Are you planning to draw Social Security?
To qualify for Social Security you will need to have worked at least 40 quarters during your lifetime. (With a few exceptions, for instance a homemaker can withdraw from a spouse's Social Security.) Eligibility begins at age 65 and the government calculates your monthly benefit from your highest 40 quarters of earnings, though there is a maximum. Calculate: How Much Can I Expect From Social Security? If you've done a good job of saving on your own or can work full-time beyond 65, there's good reason to delay Social Security benefits, says DeGuire: “Each year delayed between age 65 and 70 your benefits go up,” he says. “But the reward for delay stops at 70—once you hit that age it makes sense to start withdrawing.”
Do you plan to continue working?
Many people who “retire” continue to generate income—through investments, a hobby, consulting work. This can affect your retirement funds. For Social Security and other taxable income, such as 401(k) withdrawals, extra income will not reduce your benefits, but you may end up paying more taxes on those benefits because your tax bracket is elevated.
Extra income does not affect the amount you can withdrawal from your retirement accounts, such as an IRA or 401(k), as well as Social Security. As long as you're 59-1/2 or older, you can withdraw the full amount possible in line with IRS standards.
What expenses have you planned for?
To calculate how much you'll need for retirement you will need to plan for some additional expenses. Some commonly overlooked expenses during retirement are extra health insurance (on top of Medicare coverage), the rising cost of living, an emergency fund and long-term care insurance. “I always recommend to my clients long-term care insurance because 1 out of 2 people over age 65 will need long-term care at some point,” says DeGuire. “With nursing homes costing about $5,000 a month, that can drain your retirement funds quickly.” What will my income be after I retire?
How do you know if you've saved enough?
It's difficult to know if you've saved enough for retirement without talking to a retirement counselor. An advisor can help you determine your needs, goals and objectives for retirement—and help you accomplish them. They're often available for free counseling sessions at your local bank. “I consider financial advisors like a GPS: We put together a plan and monitor that plan. If you take a wrong turn, we help you recalculate and get back on course.”