Are You Ready to Retire? Answer These 3 Questions to Find Out

Nearly 6 in 10 pre-retirees say they feel prepared for retirement. Far fewer have actually planned for it.

Among workers age 45 and older who expect to retire within the next 10 years, 88% say they’ve thought about how they’ll generate income once they stop working, according to new research from the LIMRA Retirement Income Institute. Yet 76% either don’t have a retirement plan or have spent fewer than five hours developing, reviewing or updating one in the past year.

Half of respondents (50%) also either don’t have a written plan or haven’t updated theirs recently.

“Confidence without a plan is really just optimism,” says Bobbi Rebell, chief financial education advisor for Accredited Debt Relief.

You don’t have to predict exactly what the next 30 years will look like to know whether you’re ready to retire. But you should have a realistic idea of what you’ll spend, how much cushion you’ll have for the unexpected and how you’ll turn your savings into income.

Start with these three questions.

Can you afford the retirement you want?

The first step is figuring out what the retirement you envision will actually cost. That means estimating both your expenses and the income you’ll have to cover them.

Your retirement budget may look very different from your current one. Some work-related expenses may go away, while you could find yourself spending more on travel, hobbies, healthcare and other things you now have time to enjoy.

“Don’t create a bare-bones budget that bears no resemblance to how you actually want to live,” says Mary Ware, senior wealth advisor and managing partner at Carnegie Private Wealth in Charlotte, North Carolina.

If you want to travel, pursue hobbies or help your loved ones, those expenses need to be part of the budget, she adds.

Then, compare that spending with the income you expect to have in retirement.

“Start with your expected annual expenses and subtract reliable income such as Social Security, a pension, rental income or other recurring income,” says Adam Bergman, a tax and retirement-plan attorney and founder of IRA Financial.

Whatever remains is what your retirement savings will need to cover. For example, if you expect to spend $100,000 a year and have $40,000 in reliable income, your retirement savings and investments would need to fund the remaining $60,000 each year.

But don’t just assume the numbers work on paper. Ware recommends you “audition retirement for a year before you retire” by living for 12 months on the amount you realistically expect to have available once you stop working.

Pay attention to whether the budget feels sustainable. Were you comfortable? Could you afford the things you enjoy without constantly watching every dollar? Did unexpected expenses throw you off? This exercise can show whether your retirement budget works in real life — or needs reworking before you leave the workforce.

Could your retirement plan withstand a financial curveball?

Once you know what retirement is likely to cost, stress-test those numbers. What happens if the market drops, healthcare costs more than expected or you live longer than you anticipated?

“One warning sign for me is when the plan requires everything to go right,” Bergman says.

A way to test your strategy is to run some hypothetical scenarios. Bergman suggests asking what would happen if your investments fell 25% shortly after you retired, your expenses were 20% higher than expected because of inflation or healthcare costs, or you lived to 95.

The goal isn’t to predict exactly what will happen. It’s to see whether you could still make your numbers work if some things don’t go as expected.

Building some wiggle room into your finances can help. That could mean keeping enough cash on hand to cover unexpected expenses or avoid selling investments during a market downturn.

“Your retirement plan has to work even if the stock market and other investments have off years,” says Rebell.

And if your numbers only work under the most optimistic assumptions — or an unexpected expense would quickly throw your budget off — you may need to revisit your retirement date, spending or other parts of your pre-retirement strategy before you stop working.

Do you know how you’ll turn your savings into income?

Once you stop working, you’ll need a way to turn your savings and other resources into money you can actually use to pay your bills.

“The paycheck that used to arrive automatically from your employer is going away. You need to know how you’re going to create your own,” says Ware.

Start by taking stock of where your retirement income will come from. That could include Social Security, 401(k)s or IRAs, taxable investments and other accounts you’ve built up over your career.

Having those resources is one thing, but knowing how you’ll use them to cover your expenses month after month is another. That means thinking through how and when you’ll draw from those accounts. The order can matter because different types of retirement accounts can have different tax consequences.

For example, $1 million in a traditional IRA isn’t necessarily the same as $1 million in a Roth IRA. Withdrawals from a traditional IRA are generally taxable, while qualified Roth withdrawals can be tax-free, Bergman says.

It’s also worth considering when you’ll claim Social Security and how that decision fits with the rest of your finances, per Rebell. Delaying Social Security beyond full retirement age can increase your monthly benefit by about 8% for every year you wait, up to age 70. Meanwhile, required minimum distributions, or RMDs, generally kick in at age 73, depending on your birth year, which can affect your taxable income and cash flow.

“Factoring all of that in with advance planning will not only help plan your cash flow, it will also ease anxiety and stress when it comes to your finances,” she says.