Nobody teaches you how to retire in school, so you may not know what’s most important when planning for retirement. These are the first retirement questions to ask as you imagine your transition out of the workforce. As you move through this list, you’ll likely uncover additional questions (and answers) that provide valuable insight.
You can work through these questions yourself or ask a financial advisor to help you project how your retirement might unfold.
How Much Money Do I Need to Retire?
The amount you need depends on several factors, like your age at retirement, how long you live, and how much income you get from pensions or Social Security. If there’s a gap between your spending need and your retirement income, you’ll need to fill that gap by taking withdrawals from your retirement savings.
Three of the most important factors are how much you’re going to withdraw, for how long, and any earnings or losses on your savings. You can learn more and see a chart with savings “checkpoints” in a detailed article on how much money you need. The amount you need might range from several hundred thousand dollars to a few million dollars.
You can do a quick estimate of how much money you need by multiplying the amount you want to withdraw by 25. For example, if you plan to withdraw $40,000 per year, you’d multiply that by 25 to arrive at a goal of $1 million. This is a rule of thumb based on the controversial 4% rule, so you might want to adjust that number if you have doubts about that strategy. Any rule of thumb ignores things and is perfect, but it can help with quick estimates.
Continue reading below, or get some of these answers in the companion video:
When Should I Claim Social Security?
For many people, it’s best to wait until your full retirement age (or later) to take your Social Security retirement benefit. You can claim as early as age 62, but when you do that, you get a reduced benefit. That reduction can end up costing you over the long term, and if a surviving spouse takes over your payment after your death, they will be stuck with that reduced amount.
You can delay claiming until age 70, which results in an increase of roughly 8% per year (technically, the calculation looks at each month, so you don’t have to wait until your birthday). But after 70, there’s typically no benefit to waiting.
If you have known health issues that will result in a shorter-than-average life, it could make sense to claim earlier. It also makes sense in other limited circumstances, but it’s critical to understand that you may lose out on a substantial amount of money when claiming early.
How Much Will Healthcare Cost in Retirement?
Healthcare is an ever-changing piece of retirement. But during your working years, your employer probably paid premiums for you. When you retire, you’re responsible for those costs. You will likely use Medicare when you reach age 65, and you can buy additional coverage to augment traditional Medicare (known as Medigap or Medicare Advantage plans).
For an oversimplified estimate, a 65-year-old woman might expect to spend roughly $7,000 on healthcare in her first year of retirement. But healthcare is more complicated than that, and costs rise as you age. Fidelity says that a couple might spend $295,000 out-of-pocket on healthcare costs during a typical retirement. That includes premiums, copays, dental and vision care, and other items—but ignores potential long-term care costs.
If you retire before age 65, it’s even more complicated. You may need to buy insurance from a private carrier, switch to a spouse’s plan (if that’s an option), or use COBRA or your state’s continuation program.
How Do I Spend From My Retirement Savings?
This is a common retirement question since you’ve spent your life accumulating savings. Now, it’s time to use your retirement savings for income.
Most people move money into an IRA and spend from those accounts. For example, you might roll money out of your 401(k) or 403(b) plan and place it into an IRA with a financial advisor or discount brokerage. Then, you can withdraw money in several ways:
- You can establish monthly (or other periodic) transfers to your checking account
- You can take a lump sum out when large expenses come up
Logistically, it’s pretty straightforward to spend from your savings. Any IRA provider allows you to link to your bank account, and you can sell investments to fund your withdrawal. Just be aware of any costs or penalties for taking withdrawals, depending on where you invest. Also, be aware that withdrawals from retirement accounts may result in taxable income, so it’s smart to ask a financial planner and tax advisor what the consequences might be.
The key is to manage those withdrawals so the money lasts for the rest of your life.
How Should I Invest My Retirement Savings?
Your early years of retirement (and the years leading up to retirement) are critical for avoiding major losses. Taking withdrawals when your account balance is down can cause you to run out of money sooner than anticipated. However, that doesn’t necessarily mean you need to avoid risk altogether.
You’ll hopefully live for many years during retirement. Over time, prices rise, and you may need your account balances to grow some to keep up with inflation and fund an income stream that lasts for the rest of your life. If you keep your money in low-yielding safe instruments, you might not get enough growth.
Finding the right balance is difficult, and it’s easy to get drawn into too-good-to-be-true investments that appeal to your desire to preserve money. A diversified mix of low-cost mutual funds or ETFs can help many people fund a comfortable retirement. The question becomes exactly how to spread your money among those investments, and that depends on your need for risk.
You can find a risk-tolerance quiz on this page, which may provide insight. Plus, strategies like bucketing (where you keep your first three to five years of spending in cash—while investing the rest for growth) can also provide peace of mind. Just remember that there are pros and cons to every strategy.
When Do Most People Retire?
You can retire whenever you have the financial resources to stop working, but sometimes that’s not a choice. In fact, 40% of people reported being forced into retirement earlier than planned, primarily due to healthcare issues (caring for themselves or a loved one) or changes at their job. That statistic comes from the Employee Benefit Research Institute (EBRI).
The median retirement age is 62, according to EBRI.
If I Work Longer (or Part-Time in Retirement), Would it Be Beneficial?
Working longer can dramatically improve your chances of retirement success. The strategy can help in several ways:
- Improve Social Security and pension calculations: Social Security looks at your 35 highest-earning years to calculate your monthly retirement benefit. Pensions might look at your highest three years of earnings. By working more (typically in your best earning years, after you’ve earned promotions and seniority), you can improve those numbers.
- Delay taking Social Security or pension income: By starting retirement income at a later age, you typically get more each month.
- Fund fewer years of retirement: It may sound morbid, but you reduce the number of years between your retirement and your death. As a result, it’s easier to fund retirement.
- Opportunity to save more: As you keep working, you might be able to set aside funds in a retirement account—maybe even with matching funds from your employer.
Do Annuities Make Sense for Me?
Annuities come in a dizzying array of flavors. Some of them can be helpful for retirees, while others can cause problems.
The type of annuity that’s most likely to work in your best interest is an immediate income annuity. This is the simplest form of an annuity: It pays you monthly income for the rest of your life. You can also include a spouse’s lifetime, in many cases.
The primary stumbling block for immediate annuities is that you might not get your money back, and your beneficiaries might not receive anything after your death. You may be able to add death benefits to mitigate that risk. But the more complicated you make things, the less money you get out of an annuity.
Other types of annuities guarantee things like “hypothetical” account growth, future income, and more. But those products can cause significant problems. Ask a fee-only financial advisor before you buy an annuity for retirement.
The question to ask yourself with all annuities is whether or not you need the guarantees offered by the insurer. Those guarantees might be worth less than you think. Also, if you decide to use an annuity, it’s critical to buy from a highly-rated insurance company to reduce the risk of losing your money.
What Will Taxes in Retirement Look Like?
Taxes reduce the amount you can ultimately spend in retirement, so it’s crucial to understand how much after-tax spending you can afford. A detailed financial plan with year-by-year cash flow projections can help you understand the impact of taxes.
When you withdraw money from pre-tax retirement accounts, you typically report that amount on your taxes and you may owe income tax. Those accounts include things like traditional IRAs, pre-tax 401(k) or 403(b) balances, SEP and SIMPLE plans, and more. Withdrawals from Roth-type accounts may come out tax-free—as long as you meet all IRS requirements.
Retirement income can also cause tax consequences. In many cases, your pension income is taxable. Social Security income may also be partially taxable, depending on other items on your tax return. You could potentially owe taxes on up to 85% of your Social Security benefit.
With smart planning, it may be possible to optimize the amount you pay in taxes and maximize the amount you can spend. Strategies include planning when and how you take income and withdrawals from different sources. It could even make sense to pay taxes before you really need to—on purpose—in an attempt to avoid higher taxes down the road. Roth conversion strategies do just that.
Will Social Security Run Out of Money?
You’ve undoubtedly heard that Social Security is struggling due to demographic changes. However, it’s unlikely that your benefits will go away completely—especially if you’re at retirement age right now. However, reductions are always possible, and younger workers should be more prepared for a less-generous Social Security program.
Most news focuses on the Social Security Trust fund, which was projected to run out of money around 2035. As a result of COVID-19, the fund could run out closer to 2029. But the Trust Fund provides only a portion of your monthly Social Security payment. The rest of the money (about 76% of the funds needed) comes from payroll taxes that workers pay every year.
Given all of that, it’s likely that you’ll continue to receive Social Security income for the rest of your life. The amount might change, and the degree of those changes is unknown, but it’s unlikely that your benefits will go away (and drastic changes seem unlikely for most people, as well).
Be aware that numerous small tweaks could fix Social Security. You might not notice those changes, if enacted, and you’d continue to receive benefits.
I Get a Pension. What Happens if My Former Employer Goes Bankrupt?
You’re relying on income, but the world is changing and some businesses may have trouble meeting their obligations. Fortunately, many retirees are protected by the Pension Benefit Guaranty Corporation, an agency of the U.S. government.
The details are complicated, but if your employer goes under, you might still receive pension income, up to certain limits. For 2021, the maximum monthly benefit for a 65-year-old was $6,034 per month. If your pension is higher than that, you might experience an unfortunate reduction. Something is better than nothing, but losing pension income can be extremely painful.
I’m Still Young—What Should I Do to Plan for Retirement?
As you work toward retirement, the most important things you can do are save money and maximize your income. Also, living below your means is helpful—it helps you save money, and you’ll be able to live on a lower amount in retirement, which is more important than most people realize.
You can read more about how to retire from start to finish, including tips on where to save money and how much to save. It’s important to be a smart investor as you accumulate assets, but investing isn’t necessarily the most important thing, and it’s easy to get lured into fancy investing strategies that hurt your chances of retirement.
How Can I Get Help Planning My Retirement?
There are several ways to get insight on your retirement finances.
Online calculators and tools can help you run numbers and estimate your likelihood of success. Be sure to use several different calculators and compare the results. Different sources use different assumptions, and it’s critical to view your retirement finances from a variety of angles. Any of the big-name calculators online are a fine place to start, but you need to know that you’re using a template that isn’t customized (and might not work the way you hope it will).
For more detailed advice—ranging from a quick second opinion to detailed cash flow analysis and investment advice—you can work with a financial planner. It’s best to work with a fiduciary advisor or planner who is legally required to act in your best interests, avoid conflicts of interest, charge reasonable fees, and disclose important information (including how much you pay).
If you decide to hire a financial advisor, see the critical questions to ask your financial planner. Those questions help you determine if your advisor is the right fit for your needs, and you learn about their compensation model and potential conflicts of interest. If you need to find a new advisor, you can explore working with me.
Am I Going to Be Okay?
This is the big one, and all of the questions above provide more detail on this essential question. If you’re not interested in the boring details of your finances, you can ask a financial advisor, who should include all of the answers above in your retirement plan.
Want to talk about this more? To get answers to your questions, start with a short, no-obligation phone or video call. You can share what’s going on in your world and describe your questions. Then, we’ll talk about how I typically help people. If it makes sense to work together (ultimately, that’s your choice), we explore the next steps. Pick a time to talk online.