12/24/2011 12:15 AM ET|
Can you retire before 2013?
You want to retire in the upcoming year but could use some guidance. Start with these 20 things to do and consider, from budgeting to insurance coverage.
Happy new year! Here come your resolutions:
● Drop 10 pounds.
● Stop watching reality TV.
● Retire before 2013 rolls around.
While the first two goals are not particularly daunting, the prospect of retiring within a year's time mandates careful thought and systematic, orchestrated decisions. If you're on the cusp of retirement but unsure of what that will require, here's a 20-point checklist to get you started:
1. Consolidate your accounts. Like many people, you may have a savings account here and certificates of deposit there. Consolidate them as much as you can to make keeping track easier. Web applications such as Mint.com can link to most of your banking and investment accounts so you see them in one place.
2. Estimate what your expenses will be in retirement. You should have done this already, but double-check. Add up your current monthly expenses. Take into account what will change after you retire. Be as specific as possible. Here's an abbreviated sample worksheet. Once you've reviewed it, plug in your own monthly numbers:
- Current net income, $6,000.
- Mortgage, $1,200.
- Long-term-care insurance, $300.
- Retirement savings, $1,000
- Other expenses, $3,500
- Add $600 for health insurance.
- Add $100 for prescription co-pays.
- Reduce $400 for work clothes and commuting expenses.
- Reduce $1,000 for retirement savings.
Net income needed to maintain your lifestyle: $5,300.
3. If possible, add a financial cushion. Dallas CPA Wray Rives suggests earmarking an additional 10% of your annual budget for emergency expenses.
4. Where's the money coming from? Match your budget requirements to funding sources:
- Pension: $2,000.
- Social Security: $1,700
With an estimated monthly budget of $5,300, that leaves a $1,600 gap. Assuming a 20% tax rate, you need to withdraw $2,000 a month from retirement savings to have after-tax funds of $1,600.
5. Have you saved enough? Look at how much you've saved to see if your savings will last. Experts generally recommend a drawdown rate of no more than 4% -- anything larger may exhaust your savings too quickly. Here's how those calculations play out:
- $2,000 a month times 12 = $24,000 a year.
- Estimate how long you expect to live. For a 25-year retirement, you'll need a nest egg of $600,000 (25 times $24,000), not counting the earnings and interest you'd continue to gain on your remaining money.
"If you figure there's not enough there, you might consider working longer or taking a hard look at changing your lifestyle to live on less," says Portland, Ore., financial planner Glen Clemans.
6. How will you withdraw what you need? Say that your nest egg is big enough for you to retire. Now you need to consider a withdrawal strategy. Needham Hills, Mass., financial planner Stuart Armstrong suggests a variety of savings "buckets," each geared to a specific withdrawal time frame:
- An early-years bucket. This should be cash or highly guaranteed cash equivalents for the first two years of retirement. "This can help reduce the worry people have in the event there's serious financial market volatility," Armstrong says.
- An intermediate bucket. This should include a wider range of investments, with some growth potential, covering two to 10 years.
- A long-term bucket. This should be money focused on growth potential "to handle the inevitable long-term increases in the cost of living that can hit seniors hard," Armstrong says.
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