I know this is the last thing that you are thinking about right now, considering that you have bills up to your neck. But as much as we may ignore retirement, and push it at the back of your mind, the reality is that this is one crisis that you won’t be able to handle once reality hits home. The problem is because of the myriad problems a person faces when they retire, for example poor health because of your advanced age, depending on your investments since there is no more income coming in etc. So before you completely forget about your retirement, there a few questions you are going to ask yourself because the answers you give will basically dictate the kind of life you have when you retire. The following article by Eric Bayne indicates the questions a person must ask themselves before their retire.
How much income do you need when you retire, and will you have that much money at retirement time? The best way to know for sure is to begin the process of putting together your retirement spreadsheet today. Before you start your spreadsheet, however, you are going to need to answer the following five critical questions:
What is your annual desired retirement income in today’s dollars?
In other words, if you were to retire today, how much money a year would you need to keep you living in the fashion to which you are accustomed. Most retirement spreadsheets and calculators will have built into them projected estimates for inflation, and will be able to use this figure to calculate roughly the amount of annual income you will need at retirement.
What number of years remain until you retire?
This is crucial as it’s the number of years that you have left in which to contribute funds to your financial portfolio. The computer worksheet will take the value of your present investment portfolio, and add to it any anticipated donations up to the retirement date. The computation will predict approximately what amount of income you can expect to have when you retire. If this dollar amount is less than what you require, you will have to ether add more money to your portfolio, alteration of your investing strategy, or lower you expected standards of living at retirement.
What is the sum of all your sources of expected retirement income?
This includes your expected Social Security income as well as any of the following investment plans – 401k, 403b, 457, Keoghs, SEP, IRA, and pension plans. It’s important to get as much concrete figures as you can, and put them on paper. This helps to avoid the rose-colored glasses scenario where you think you have more money than you actually do. A major cause of people getting to retirement, and being shocked that they don’t have enough money to live at their current lifestyle level, is their failure at an earlier age to take a hard look at their financial situation when they had plenty of time to do something about it.
How many years will your retirement funds be expected to last?
This is a sensitive question as it gets into life expectancy, and mortality issues. Once you begin to collect Social Security, your income from it will be relatively constant. But Social Security will most likely cover less than half of your desired income. And in many cases, it will cover much less. This means that your remaining investments have to supply the rest of your income. In the best of circumstances, you will be able to live off of a combination of the interest and dividends from your investments, and not have to touch the principal. If, however, you are forced to start drawing against the principal, your annual income from it will continually decrease until gone. Knowing how many years your retirement funds will be necessary to will help you make the decision as to whether you should start to draw the principal down, or accept a lowered standard of living.
How is your health?
For many retired people, their medical bills are their biggest out-of-pocket expense when they retire. Even with Medicare, you may have deductibles to pay for. We can’t look into the future, and say for certain what our health will be at retirement. But if you already are taking medical treatments for a disease such as high blood pressure, diabetes, cancer, and so on – you can be almost certain that those bills will increase significantly as you reach retirement age. Many people when making their retirement plan, forget planning for future medical bills. But now, before your retirement, is the best time to do this.