Planning

Seven Questions to Ask Yourself Before Retirement

August 13, 2024

Seven Essential Questions to Ask Before Retirement

As you approach retirement, there are countless factors to consider that will shape your financial future and overall lifestyle. While some might focus on the basics like budgeting and investment strategies, there are deeper questions that can make or break your retirement experience. On a recent episode of the Retire Ready Podcast, Kyle Hammerschmidt and I discussed seven critical questions to ask yourself before making the leap into retirement. Here’s a comprehensive look at these essential questions and why they matter.

1. When Should I (or We) Start Social Security?

Social Security is a cornerstone of retirement planning, but its complexities often lead to confusion. You can begin claiming Social Security benefits as early as age 62 and defer them up to age 70. The decision on when to start can significantly impact your retirement income, as delaying benefits generally increases your monthly payment.However, Social Security is not just a simple calculation. It interacts with other aspects of your financial life, including taxes. The longer you wait to claim Social Security, the more substantial your monthly benefit will be, but it also affects how your other income sources are taxed. For couples, the strategy can become even more complex as you must coordinate your claims to optimize benefits. Think about your health, financial needs, and overall retirement strategy. Your decision should be part of a broader tax and income planning strategy, rather than a stand-alone choice.

2. What Health Care and Other Unexpected Costs Can I Expect?

Health care is often anticipated to be a major expense in retirement, but it's important to recognize that it may not always be the top cost. In reality, taxes could surpass health care expenses for many retirees. A comprehensive spending plan should account for both expected and unexpected costs. For instance, consider potential vehicle replacements, home maintenance or relocation costs, and the cost of leisure activities like travel. Building a buffer in your budget can help you manage unforeseen expenses more comfortably. Health care costs, including premiums and out-of-pocket expenses, often rise faster than general inflation. Therefore, it's crucial to plan for higher health care inflation rates and consider how these expenses will impact your overall financial plan.

3. How Do I Plan for Inflation and Economic Uncertainty?

Inflation can erode your purchasing power over time, so it's essential to plan for its effects on your retirement savings. Inflation isn’t uniform; some expenses, like healthcare, may inflate at a higher rate than general costs. To mitigate inflation risks, establish a spending plan that distinguishes between essential and non-essential expenses. Stress-test your financial plan against various economic scenarios, including high inflation rates, to ensure it remains viable over the long term. Consider investment strategies that can potentially outpace inflation and maintain your purchasing power.

4. How Do I Plan for Taxes in Retirement?

Taxes can significantly impact your retirement income. Understanding the three main tax buckets—tax-deferred, taxable, and tax-free—will help you manage your retirement funds effectively. For example, withdrawals from tax-deferred accounts (like IRAs and 401(k)s) can trigger taxable income, potentially increasing your tax bill and affecting other income streams like Social Security. Strategic tax planning involves balancing these tax buckets and considering how to minimize taxes over your retirement years. Roth conversions, tax-efficient investment choices, and careful planning of Social Security benefits can help reduce your overall tax burden.

5. How Do I Generate and Manage Income in Retirement?

Once you retire, generating a reliable income stream becomes a priority. There are generally two approaches to retirement income:

  • Total Return Approach: This involves selling shares from your investments to generate cash. While it can be effective for growing your investment portfolio, it requires careful management to avoid depleting your assets.
  • Income-Based Approach: This strategy focuses on investments that provide regular income, such as dividend-paying stocks or bonds, minimizing the need to sell assets.

Decide how you’ll draw down your savings and manage income to minimize taxes and ensure you can sustain your lifestyle throughout retirement. Coordinating your income sources with tax strategies is key to maximizing your retirement funds.

6. Have I Saved Enough for My Desired Retirement Lifestyle?

Determining whether you have saved enough for retirement depends on your desired lifestyle. Consider what kind of retirement you envision: Will you maintain your current lifestyle, or are you planning to spend more early on and then scale back? Understanding your lifestyle goals and spending needs is crucial. This involves estimating your future expenses, including any potential changes in your spending patterns over time. A well-defined lifestyle plan helps in assessing whether your savings are adequate and in developing a tailored investment strategy.

7. What Do I Want My Legacy to Be?

Legacy planning is a deeply personal aspect of retirement. Your legacy might involve financial support for children or grandchildren, charitable contributions, or simply ensuring that your assets are managed according to your wishes.Consider how you want to use your resources during your lifetime and after your passing. This might include funding memorable experiences with family or supporting causes important to you. Legacy planning should be integrated into your overall financial strategy, balancing your current needs with your long-term goals. Retirement planning involves much more than just accumulating savings. It requires a thoughtful approach to income generation, tax management, health care, and personal goals. By addressing these seven essential questions, you can develop a comprehensive plan that aligns with your vision for retirement and helps ensure a secure and fulfilling future. For those nearing retirement or already retired, it’s never too early to start addressing these questions. The sooner you begin planning, the better you’ll be prepared to enjoy your retirement years with confidence and peace of mind. You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This article is intended for educational purposes only. Nothing in this article constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost. MOKAN Wealth Management is a registered investment adviser with the SEC. Registration of an investment adviser does not imply a certain level of skill or training.