Ready to Retire? 6 Important Factors to Assess Your Retirement Readiness

Retirement readiness measures how equipped you are to comfortably live the golden years of your life. It estimates your financial preparedness and the degree to which you can support your current standard of living after you retire. According to the 2019 Consumer Finances Survey of the Federal Reserve, in households governed by a person between 65 and 70 years of age, 78.4% owned a home out of which 70% of them were in some kind of debt, including 37.6% who had home loans. What is even more astonishing is that only 48.2% of them had savings in an Individual Retirement Account (IRA) or another similar retirement savings plan. Such low statistics indicate the need for individuals to learn more about retirement planning so that they may be able to prepare themselves for a comfortable retirement life.

Even though retirement readiness is unique to each individual, here are some factors that can help you assess how well you would be able to manage your finances during the non-working years of your life:

1. Estimate your retirement income needs

The first step to knowing how ready you are for retirement is to take stock of your income needs during retirement. For this purpose, evaluate your outlays, including general house expenses, medical requirements, transportation, travel, life-long care, and other expenditures like a child’s marriage, buying a home, investing in real estate, etc. Your spending may not be similar each year. Rather, it is likely that you will spend more than you estimated in some years, and have more savings in your bank account than you originally anticipated in other years. Irrespective of your spending, it is to be noted that critical care needs, including health-related costs, etc. are expected to rise as you age. You also need to consider the impact of inflation and the rising consumer prices to finally arrive at an estimated figure that you would need to ensure a comfortable life during retirement. According to retirement experts, you will need at least approximately 80-90% of your pre-retirement income to be able to sustain your post-retirement living standards.

2. Determine and maximize your retirement revenue sources

Once you know your income requirements, the next step to understand your retirement readiness is to determine the value and availability of your revenue sources to sustain your retirement lifestyle. In most cases, people rely on their pension and Social Security benefits to largely fund their retirement. So, it is important to know how much you will get from each of these sources. Check if the income matches the expected expenditure. If it does not, take steps to enlarge these benefits. One wise method to do this would be to delay your Social Security withdrawals. Legally, you can start taking Social Security benefits from the age of 62. However, delaying withdrawals will improve your returns. For example, a person who withdraws Social Security benefits at the age of 68 (one year after the official retirement age) can expect returns equivalent to 108% of the total monthly benefits. As per research, an average retiree can add more than 50% to the Social Security check if the withdrawals are delayed until the age of 70. In the case of your pension, if you take a lifetime payout option along with a cover that protects your spouse after your death, you will reduce your overall payout. These decisions play a vital role in establishing your retirement readiness. The higher your pension or Social Security benefits, the easier it is for you to cover your income needs without relying on your portfolios to pay your bills. In case your pension and Social Security funds are insufficient, you may consider adding annuities to your portfolio to get a regular stream of income.

3. Understand your planned spending rate

Once you know the fund requirements and how much your pension and Social Security benefits can cover, the leftover balance, if any, would be the shortage. These expenses will need to be covered by your portfolio and retirement savings accounts like a 401(k). This will also help you determine what you should assign as your annual withdrawal rate, which is the expected yearly withdrawals divided by your current portfolio’s value. If you have a reasonable withdrawal rate, you are preparing yourself well for retirement. Ideally, experts suggest a 4% withdrawal rate. According to this rule, you can take out 4% from your savings in the first year of your retirement and then subsequently adjust your withdrawals according to the inflation rate. However, it is advisable to be prudent about your withdrawals and not withdraw too much. Moreover, make a note to be slightly flexible, since your retirement expenses may not be fixed for all your retirement years. Some years may be high, while others could be lower in comparison.

4. Check your portfolio structure

After you get a better understanding of your finances, it may be beneficial to review if your current portfolio can support your retirement plan. You may not be able to only rely on bonds and cash deposits to fund the needs of your golden years. You would need to add some growth from stocks to grow your nest egg while still maintaining your overall risk appetite. Use your cash flow needs to understand what percent of the portfolio should be in cash, bonds, and stocks. Ideally, you should have near-term expense money in cash, mid-term expense money in bonds and dividend-paying stocks, and long-term more intense expense funds in adequately diversified stocks. This structure helps you to minimize the risk of stocks since the buffer period is considerably longer to allow stocks to regain their value overtime.

5. Assess your tax management

Your assets are divided into different segments according to their tax applicability. These sections include tax-deferred, taxable, and Roth accounts. Each of these accounts has a specific tax treatment, which affects your securities within these funds. So, know the tax implications of each asset and take steps to minimize tax liabilities. You could consult a tax professional to make better asset allocations and strategize how you would withdraw from these savings to eliminate penalties and tax duties. You could also think of converting one asset type into another, like a traditional 401(k) to a Roth IRA account, to take advantage of tax-free growth.

6. Review your insurance coverage and estate plan

Insurance plays a very critical role in estimating your readiness for retirement. According to the Health View Services report, a fit retiree of 55 years will spend $13,165 on average in yearly medical charges till the age of 65. The expenses rise higher to $16,635 if the retiree has an existing health condition such as diabetes. These costs are exclusive of long-term care, which would be required by 70% of seniors above the age of 65 at some point in their life. And because Medicare plans do not offer this benefit, it is good to opt for a comprehensive insurance cover before you transition into the non-working years of your life. Furthermore, you should also have a strong estate plan in place before taking the final call. Despite being a pertinent component of one’s financial plan, estate planning has reasonably declined since 2017. According to a survey by Caring.com, only 32% members (over 2400 Americans) said they had suitable estate documents, as compared to 42% in 2017. It is therefore advisable to include estate planning as a part of your comprehensive financial plan as early as possible.

To sum it up

In order to ensure your comfort during the non-working years of life, it is beneficial to use the six important factors mentioned above to assess how well-equipped you are for retirement. You can also take advice from vetted financial advisors to be more certain of your finances before you officially retire.

If you have any questions, visit Dash Investments or email me at dash@dashinvestments.com.

About the author
Jonathan Dash is the Founder, CEO & Chief Investment Officer who personally oversees all investment management and asset allocations for his firm, Dash Investments. Prior to founding his firm, Mr. Dash held positions at several prominent investment management firms, as a senior securities analyst. Over his 20-year career in the investment management industry, Mr. Dash has established a reputation as a successful entrepreneur, turn-around specialist and a superior securities investor. He has been profiled by The Wall Street Journal, Barron’s and CNBC, as a top investment advisor with a track record of creating value for his firm’s clients.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. In addition, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.