For many Americans, retirement is the ultimate financial goal, one which takes decades of saving. But between managing retirement accounts and balancing portfolios, it can be easy to lose sight of what you’re saving for. As retirement gets closer, ask yourself these three questions to ensure you’re on track for a meaningful retirement.
First, ask yourself what lifestyle you want in retirement. Thinking about your lifestyle in retirement is the most important first step. Consider choices such as where you want to live, what you want to spend your time doing and which people you want to do those activities with. Having a general idea of where you want to live can help determine your living expenses. Do you want to stay in your current home or buy a new home or even a second or third home? Live in a city or a small town?
If you're uncertain about your preferred location, envisioning your retirement activities can help guide your decision. You may want to continue to work part-time in your industry. Perhaps you want to golf, sail or hike or join the latest craze: pickleball. You’ll want to find a location conducive to your favorite hobbies or work.
The last lifestyle consideration is the people you want to spend time with. Apart from your significant other, do you want to live near family and friends? Do you want to live with other people in retirement?
Answering questions about your retirement lifestyle is crucial for determining your progress toward your retirement goals. If you do have a significant other, make sure you think through these questions together.
If you have a general idea of your lifestyle, the next thing to ask yourself is: How much will this lifestyle cost? Come up with the best estimate of your projected expenses. Are you able to afford the lifestyle you want? The two biggest expenses in retirement are typically housing and medical costs.
Make sure to include community fees in your housing estimate, like HOA dues, condo fees, real-estate taxes and any other expenses beyond rent or housing purchase costs. For medical expenses, include any commuting costs, prescription drugs and dental coverage. The expected cost for health care over a person’s retirement is only going up.
Another expense people sometimes don’t consider is taxes. Depending on where you derive income in retirement, you could be paying income taxes, capital gains taxes, and dividend taxes. Even Social Security income can be taxable.
Once you have a good estimate of your expenses, then the next question is: Can you afford the lifestyle you want? Look at your guaranteed sources of income like Social Security and a pension. Next, see what you can reasonably expect as income from your investments. A good estimate is a 4% withdrawal rate, meaning that for every $100,000 in investments, you can get $4,000 a year in income. Do these income sources cover your desired retirement lifestyle expenses? If not, you might need to adjust your retirement plan, whether that involves revising your timeline or considering a more affordable location.
Answering these three big questions as you near retirement can help keep you on track for a personally meaningful retirement. A CERTIFIED FINANCIAL PLANNER™ professional can help you determine if your goals are attainable or need some adjustment. Find your CFP® professional today.
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