Emily Brandon

It can be difficult to determine if you are prepared to permanently exit the workforce. You need to save enough to last the rest of your life -- and you'll need to manage that money to beat inflation and minimize taxes. Retirees should also have a plan for remaining connected to others and staying relevant in this new life stage. Here's how to tell if you are ready to retire.

Establish a retirement budget.

Retirees no longer have to pay for professional work clothes or transportation to the office. But unless you enter retirement newly mortgage-free, most of your other expenses are likely to remain the same after you leave your job. "I don't find that people's expenses go down in retirement," says Leisa Brown Aiken, a certified financial planner for Veo Financial Counsel in Chicago. "You're probably going to spend as much or more as you spend now." If you plan to travel or take up new hobbies, your expenses could even increase in retirement.

Examine your cash flow.

Most retirees receive income from several sources, including Social Security, pensions, investments, and increasingly, a part-time job. You need to make sure you will receive enough income from these or other sources to pay all of your monthly bills. Less common sources of retirement income include home equity, annuities, insurance, royalties, and rental income.

Size up your nest egg.

How much you need to save for retirement depends on what your retirement expenses are and how much income you have coming in from other sources. Your savings needs to fill in the gap between your monthly living costs and your Social Security, pension, and other guaranteed sources of income. Retirement savers should estimate how long they will live and take steps to protect that money from inflation. Donald Duncan, a certified financial planner for D3 Financial Counselors in Downers Grove, Ill., says healthy baby boomers should plan as if they will live until at least age 90, and perhaps 100.

Develop a withdrawal strategy.

Retirees need a plan for drawing down their assets. Most financial advisers say that you can safely spend 4 percent of your nest egg each year. Withdrawals from tax-deferred retirement accounts become required after age 70 1/2. The withdrawal amount is calculated by dividing your IRA and 401(k) account balances by the Internal Revenue Service's estimate of your life expectancy. The penalty for failing to take out the correct amount is 50 percent of the amount that should have been withdrawn, in addition to regular income tax.

Minimize taxes.

Your entire nest egg isn't available for spending in retirement. When you take money out of tax deferred 401(k)'s and IRAs in retirement, regular income tax is due on the withdrawals. If your tax bracket fluctuates from year to year, you can time your retirement account withdrawals to minimize taxes. "Do withdrawals or convert to a Roth when you are in a low tax bracket and, if you can, withdraw less when you are in a higher tax bracket," advises Aiken.

Maximize Social Security.

Retirees can sign up for Social Security beginning three months before their 62nd birthday. But annual payments increase for each year you delay claiming until age 70. Seniors who sign up at age 62 get smaller payments over a longer period of time. But retirees who delay claiming will get higher payments in old age when they are less able to work and more likely to develop health problems.

Get health care coverage.

Many people delay retirement until they become eligible for Medicare at age 65. Sign up right away to avoid a Medicare Part B premium increase of 10 percent for each 12-month period of delayed enrollment. You'll also need to shop around for the Medicare Part D plan that best meets your prescription drug needs. Those who retire before age 65 need to have a plan to purchase health insurance. Consider whether your employer provides health coverage to retirees, you are eligible for COBRA coverage, or will need to purchase your own individual policy. Health insurance exchanges will become operational in 2014.

Prepare for long-term care.

Retirees need to consider the possibility that they might need long-term care. Medicare pays for up to 100 days of nursing home care, but a prolonged illness or chronic condition could require care for a longer period of time. Purchasing a long-term care insurance policy is one way to shield yourself from high chronic care costs, but these often expensive policies are not appropriate for all retirees. The health reform bill created a voluntary government long-term care insurance program, Community Living Assistance Services and Supports (CLASS), which will begin in January 2011.

Consider new activities.

Plan to embrace a new activity in retirement. "You have to be mentally ready to not go into the office anymore," says Duncan. "You need to have something to replace the time that you spent working such as a hobby or travel." Consider volunteer work, taking a class at a local college, or a part-time job.

Join a social circle.

When you leave your job, work-related social functions and lunches with coworkers often stop. "If your whole social life is tied up in your work life, it is a difficult transition," says Warren Ward, a certified financial planner for Warren Ward Associates in Columbus, Ind. Try to make friends or join a social circle outside of your company before you retire. "Very often, people will find a hobby or two, volunteer at the library, or become a boy scout leader because it introduces you to a new social circle," says Ward.

Coordinate with your spouse.

Retirement may change your relationship with your spouse. Perhaps one spouse is ready to retire and the other wants to continue working. Even if you retire together, you may have to renegotiate responsibilities and boundaries. "The act of retirement itself can put a strain on a marriage because they were both working or one was working and one was home and now they are both home at the same time all day, " says John Migliaccio, director of research for MetLife's Mature Market Institute. "Negotiating retirement with your spouse is very important." Sure, you'll be able to take lingering walks on the beach in retirement, but you also need to decide who mows the lawn and who unloads the dishwasher now that neither of you is working.

Pick out a place.

Once you're no longer tied to your job, you're free to move anywhere you wish. Frugal retirees can downsize into a smaller home or condo or relocate to a low cost area of the country (college towns often offer a low cost of living and plenty of amenities.) Many seniors move to sunnier climates and never shovel snow again, and some choose to move closer to their grandchildren.

Keep your emergency fund.

Although the fear of losing your job disappears when you retire, the need for an emergency fund doesn't. Retirees still get leaky roofs, broken-down cars, and other large and sudden expenses. "It makes sense for retirees to have a fund of cash of some kind, one to three years' worth of money that they will need in addition to Social Security, and keep that in something really safe," says Aiken. "It's your short-term spending money." Keeping your emergency fund in an FDIC-insured account will allow you to delay withdrawals from investment accounts in years when the stock market performs poorly.

Pay off all debts.

Pay off as much debt as you can before you retire. "In general, people should have all their debts paid off when they retire," says Aiken. "If you have no mortgage you have more flexibility when things happen."

Take a practice retirement.

One way to tell if you will enjoy retirement is to test it out by taking an extended vacation or leave of absence from your job. "Very often, people who are used to working really hard are just lost when they don't have some place to go," says Ward. "Their value in their own mind is being part of the workforce and going in and solving problems for people every day." Find out if you will enjoy hours of free time and lingering lunches or if you'll crave work to structure your days. "We encourage people to take a leave as an alternative to retirement as a chance to sample it," says Ward. "Consider what you want to do next and what you are going to give up."


Personal Finance - 15 Ways to Tell if You Are Ready to Retire

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