For most people, as soon as they enter the workforce, they look forward to the day they can finally get out. What does that usually mean? Preparing for retirement.
Whether you’ve made smart investments that grow over time, set up a retirement plan like a 401(k), both, or anything in between, you’ll still need to carefully plan your workforce exit.
Let’s take a look at the five things you absolutely need to know before pulling the plug on your 9 to 5, from Social Security to Medicare.
1. Pay Off Debt or Invest in Big Expenses First
Think of any debt you still haven’t paid off. Is it big or small? How much exactly? When do you need to pay it off (or when would you like to)? These are questions you should know the answers to before walking into the world of retirement.
Once you’ve answered those, it’s time to move on to a few more:
- How long would it take you to pay off your debt with the income you make from your job?
- How long would it take if you were living off of retirement money?
Odds are, the faster option will always be paying off debt while working for an active income. Plus, you’ll also have peace of mind knowing your paycheck isn’t going anywhere (and thus, you can make all your payments on time and in the right amounts). Depending on the sources that make up your retirement income (social security, stock dividends, pensions, etc.), you might have high months and low months.
But, what if you don’t have a debt to pay off? Does that mean you’ve got the green light to say au revoir to your day job?
It’s time to switch your focus from debt to dreams. Think about some of the bigger purchases or investments you want to make in the future. A new house? An RV? A boat? New car? Big vacation?
Consider spending your money on those dream items now so your retirement savings won’t be damaged if things go south and you surpass your budget.
2. Check the status of your current investments (and explore new investment options)
Before retiring, you need to know where you have money waiting for you, how you’re going to withdraw it, and where your income will come from once you no longer have a 9 to 5.
Step one is to understand your investments so you can build an appropriate strategy. For example, it’s highly recommended to consolidate as many of your assets as possible to make an investment policy statement.
To get started, consider hiring a financial planner. They have ample knowledge to help ensure your retirement plan is realistic, sustainable, and the best it can be. Their entire job is to guarantee you can live off of it.
Besides working with financial planners, another common strategy retirees use is rolling old retirement plans into an Individual Retirement Account (IRA).
Last but not least, check up on the non-retirement-related investments you’ve made over the years.
Did you buy shares of stocks? Purchase bonds or treasury bills? Invest in real estate? These investment moves work excellent for passive income, but you can also cash out at any time. If you haven’t recently, check to see just how much your money has grown or what your profit margins are, then determine whether or not you want to sell them off or keep them going.
These are a few of the many ways you can prepare yourself for retirement and ensure you have enough cushion to finally leave the workforce. But what if you haven’t made many (or any) investments that bring you passive income, or you’ll need other ways besides social security and retirement savings to live the retired life you envisioned?
Well, that’s when step two comes into play: explore new investment opportunities. It’s never too late to start making passive income.
3. Know your Social Security benefits like the back of your hand
Research has found that for approximately two-thirds of retirees, over half of their income comes solely from social security.
It goes without saying that educating yourself on social security can make a huge difference in your retirement planning. You need to know how to claim it and what your benefits are. Being among that two-thirds statistic means when to claim your social security will be perhaps the biggest, most important decision of your retired career.
As you likely already know, social security is essentially the replacement for your used-to-be income. Certain individuals are also eligible for other benefits, like disability and survivor benefits.
Since benefits differ from one person to the next, the only way to know exactly which ones you’ll receive is to apply for the benefits, which you can do on the SSA.gov website. However, you can easily start planning for them by using the Benefit Calculators they offer. Keep in mind you’ll need to have created an account though.
4. Create a retirement budget and plan how you’ll make income
We already discussed checking on your investments and even ways to make passive income, but now, it’s time to do the dirty work: create a budget and stick to it.
When it comes to retirement, saving money and making money are equally important. You need to ensure that you aren’t placing all your eggs in one basket (read: one income stream), and you also need to monitor where that money is going once it hits the bank.
There are four major types of assets that are typically used to fund retirement:
- IRAs (Individual Retirement Accounts) and retirement plans (think 401(k), ESOP, and 403(b))
- Investments (like we discussed earlier)
- Personal savings
- Wages (i.e. part-time jobs, odd jobs and gigs, etc.)
For a diverse income stream, consider using 3-4 of these options.
Although the idea of working a part-time job or picking up gigs might not sound like your ideal retired life, without proper planning, it might be necessary in times of need. However, many retirees find that turning a hobby (say, making crafts or sewing) into a side hustle keeps them busy, productive, and happy. Especially with the internet, remote working or freelancing is more accessible than ever.
And lastly, there are the money-making venues we talked about earlier, such as social security and annuities. And depending on the jobs you’ve worked, you might also receive a pension.
5. Get familiar with your health insurance options
As a full-time worker, health insurance likely wasn’t something that weighed heavy on your mind. Since it’s typically provided through your employer, getting health insurance was just a matter of finding a job with good benefits. But as a retiree, how you’re going to cover those doctor bills is now up to you.
Luckily, you have a few different options depending on your age.
Under 65 Years Old
If you’re retiring before your 65th birthday, you aren’t yet eligible for Medicare, which is provided by the Social Security Administration. Instead, your options include:
- Spouse’s insurance policy
- Medical coverage for retirees by your employer
- COBRA coverage
- A Health Insurance Marketplace plan
Over 65 Years Old
Once you’ve hit the magic number, you’re now eligible for Medicare. In fact, you have to file by the time you turn 65 if you don’t want to face hefty penalties. Something else to watch out for is making too much money–you could be charged more through IRMAA.
Because of this–and the fact that many of your decisions when it comes to Medicare are irreversible–many retirees choose to hire a financial advisor. A professional–who can likely recite these benefits in their sleep–can be a major help in correctly aligning your benefits with your income.
If you’re a veteran, you may qualify for medical coverage through the Veterans Benefits Administration.
And there you have it! 5 must-know things before sunsetting your full-time job. With these tips, you’ll be more knowledgeable about retirement itself and confident in your ability to sustain life as an ex-worker.