Ask anyone if they’re ready for retirement, particularly after a difficult day, and you will likely hear an immediate “Yes!” But when it comes time to seriously consider the issue, the question of readiness becomes much more difficult. How much should I draw from my IRA or 401(k)? At what age should I retire? There are so many factors to think about!
At the Bradford Pine Wealth Group, we recommend splitting the retirement decision into two parts to help sort through all the important factors involved: First, consider your emotional readiness and your plans for the golden years. Second, consider your financial readiness, including the timing of your retirement, your income sources, and how much money you’ll need to live the retirement you want.
The first and most important question in retirement planning is whether you (and your spouse, if you are married) are emotionally prepared for the next phase in your life. What do you intend to do? Creating a plan for your retirement years will help ease the transition, so be sure to have a clear idea of what you want from retirement on top of leaving your job. Also, keep in mind that we often define ourselves by our careers, and that the sudden absence of the structure, relationships, and accomplishments in the workplace can cause some confusion and strain. How will you adjust for and prepare for this?
Financial readiness can only be determined by taking into account the goals and plans you’ve created for your retirement. From here, you can begin to determine how much that lifestyle will cost and compare it to your savings and the amount of income you’ll be able to count on. At this point, you should consider any social security, 401(k) and IRA plans, or health benefits you might be entitled to during your retirement years.
Of course, timing is a key component of determining both your savings levels and your income rates. Postponing your retirement will generate a few more years of income and saving, while an early retirement will do the opposite. Your age at retirement will also affect the amount of social security you’re entitled to and your ability to take penalty-free withdrawals from your 401(k) or IRA.
Other factors also impact your financial readiness and include your planned withdrawal rates from retirement savings, inflation expectations, and the impact of market fluctuations on your investments. It is often helpful to start with some rules of thumb; for example, you may estimate that you’ll need an annual income of 60-80% of your pre-retirement income, which might roughly equate to drawing down 4-5% of your total retirement savings per year. From here, consider your goals and how much money you might need to accomplish them. For example, if you are thinking of joining a country club or buying a summer home or traveling a few times per year, you may need to rely on a higher percentage of your pre-retirement annual income.
All in all, considering your emotional and financial readiness for retirement is a delicate and important thought process. With some reflection and an understanding of the key issues involved, you can help create a feasible plan for the exciting next phase in your life.
For more detailed information about this topic, including advice on investment strategies and asset allocation considerations, read “Retirement Income: The Transition into Retirement”.
If you are seeking detailed information about rolling over your 401(k) or about managing your IRA, I highly suggest downloading my free eBook, “10 Tips You Need to Know About Your IRA Rollover”. This short book is packed with critical information that will help you make the right decisions about your retirement savings.
Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors
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