Do not even think about retiring before you can answer these 3 questions – Motley's Fool

Retirement is an exciting milestone in life, and most people can not wait until they can finally leave their jobs and have the opportunity to live a life of leisure.

But before you retire, you should ask yourself many questions to make sure you are ready for this next stage of life. The last thing you want is to retire before you are ready and regret your decision. So the more prepared you are, the happier you will be.

Before retirement looms, ask yourself these three important questions to make sure you're on the right track.

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1. How much of your savings can you withdraw each year?

It can be difficult to determine how much you need to save depending on the age of retirement, but if you leave your job and your savings run out after five or ten years and you can not return to work, you may be out of luck. So long before you even consider retiring, make sure you know how much you can withdraw from your savings so your money lasts the rest of your life.

One of the simplest ways is to use the 4% rule, which states that if you withdraw 4% of your total savings during the first year of retirement, then adjust your withdrawals each year to reflect the inflation, your savings should last around 30 years. So, if you plan to save $ 500,000 by retirement, that means you can withdraw $ 20,000 in the first year of your retirement.

If that is not enough to live, you will have to work to save more before you retire. To know exactly what you should aim to save, you can work backwards by multiplying the amount you need each year by 25. For example, if you expect to need about $ 40,000 a year to retirement, multiply this number by 25. to obtain a result of 1 million dollars. Then, to check your work, take 4% of $ 1 million for a $ 40,000 answer.

If you are shocked by the high cost of retirement, remember that the harder you work to at least achieve your savings goal, the better the retirement will be. And the sooner you calculate where your savings will go and if you are on track, the easier it is to make the necessary adjustments.

2. How much will you receive from social security benefits?

Fortunately, if your savings do not exactly match your expectations, social security benefits are another source of income in retirement. But your benefits are designed to replace only about 40% of your income, so you should not rely on it as the main source of income.

To find out how much money you will have to spend with your personal savings to pay the bills in retirement, you must first determine the amount of Social Security benefits you will receive. For a more accurate estimate, you can view your statements online by creating a mySocialSecurity account. This will give you a personalized estimate based on your income. You can also use the Social Security Administration's online calculator to get a rough idea of ​​your benefits.

Keep in mind that the amount you will receive will depend on the age you declare. The only way to receive the full amount of your benefits is to request payment at your retirement age (FRA). If you apply earlier (from age 62) or later (up to age 70), you will receive either a reduction or increase in benefits.

For example, suppose your FRA is 67 and you have determined that if you apply at this age, you would be eligible to receive $ 1,500 a month (or $ 18,000 a year). You think you need about $ 40,000 a year in retirement. Therefore, if you subtract the $ 18,000 a year you receive, you will need $ 22,000 a year from your personal savings. However, if you applied for benefits at age 62, your checks would be reduced by 30%, leaving you with only $ 1,050 a month, or $ 12,600 a year. In this case, assuming you still need $ 40,000 a year, you would need to earn $ 27,400 from your own savings each year.

3. How will you cover health costs?

About nine out of ten Americans already depend on Medicare or are planning to do so to cover their health care needs in retirement, according to a survey by the Nationwide Retirement Institute. Yet three-quarters of seniors do not understand exactly how the program works. .

If you are unsure of what you are going to pay for health insurance or the costs you incur in retirement, health care costs can quickly deplete your retirement fund. Even with Medicare coverage, you will still need to pay all premiums, deductibles, co-insurance and co-payments. In addition, Original Medicare (or Parts A and B) does not cover most routine care or prescription drugs, so there are other costs in your charge that you could be liable for. Instead, you can sign up for a Medicare Advantage plan with more coverage, but you may have to pay higher premiums each month.

It is difficult (if not impossible) to predict what types of health care costs will occur in retirement, but if you retire on the assumption that these expenses will be fully covered by insurance, you will have an expensive surprise. Make sure you have a rough idea of ​​the costs you will be responsible for and then save those expenses in your retirement plan. For example, you can set aside a certain amount each month in a health savings account, which provides tax benefits when it is used for medical expenses. Or you can purchase long-term care insurance to prepare for the exorbitant costs of nursing home care (another expense that Medicare will not cover).

Preparing for retirement is not easy, but the best way to get ready is to do as much research as possible. The more you know about the cost of retirement and the way you do it, the more pleasant and stressful your golden years will be.