Leaving the working world may seem really attractive -- especially amid the economic and social turmoil resulting from the coronavirus pandemic. But retiring before you're financially ready could be a serious mistake you regret for the rest of your life.
The good news is, there are a few questions you can ask yourself to see if you're actually ready to hand in your notice. In fact, if you answer these five questions, you'll get a pretty good idea of whether retiring now is right for you.
1. Assess your spending needs
The first step to making sure you're ready to retire is to figure out how much it's actually going to cost you to live as a retiree. This should include both essential spending and expenditures on fun things you'll do to pass the time.
You can start with your current budget as a framework and estimate how your spending will likely change after you're no longer a worker. Or you can base your estimate on expert assessments suggesting you'll need about 70% to 80% of your pre-retirement salary to maintain your living standard.
Obviously, the more accurate you can be with estimating your budget, the better able you'll be to determine if retirement is within reach.
2. Tally up your income from all different sources
Chances are good you'll be relying on both Social Security and withdrawals from a retirement account during your retirement years. If you're trying to retire with no savings, you'll likely find it extremely difficult to live on Social Security alone.
You need to have some idea of the total income both your savings and your retirement benefits will provide.
You can sign into your mySocialSecurity account to find out how much income to expect -- but be aware your age at the time you file will affect your benefits. If you're planning on claiming before full retirement age, your checks will be smaller for the rest of your life.
If you've got other sources of funds such as alimony, rental income, or a pension from your employer, consider those too as long as they'll continue for life. By comparing your projected income to the spending you plan to do, you'll see if you've got enough to retire.
3. Make sure you've got some liquid cash
Although some of your money should be invested, even as you near retirement, you don't want to rely solely on your stock investments to provide retirement income. That's because, as recent events have shown, the market can sometimes be very volatile and surprise events can send your stocks plummeting.
It's generally a good idea to have enough money in a savings account to support you for a few years without selling any of your investments. If you have liquid funds, you can draw from these accounts during market downturns so you can wait out the bear market.
If you don't have money to live on for a few years without having to sell investments, consider working a little longer until you do.
4. Consider how you'll cover healthcare
If you're 65 or older, you can qualify for Medicare -- but you should be prepared to pay out-of-pocket expenses. These costs could include premiums for supplementary insurance as well as expenditures for things Medicare doesn't cover.
If you're not yet 65, you'll need to get covered through a spouse's plan, by keeping your employer coverage under COBRA, or by buying an individual plan. Any of these options can be costly, so see which are available to you and how much you'll have to pay each month. Then make sure that amount fits in your budget.
5. Make a plan for how you'll spend your time as a retiree
You don't want to retire and be bored -- especially since it may be difficult to get back into the workforce after you've left it. Think about what you'll do all day and make sure you've got some ideas for how you'll spend your time.
Are you ready to retire?
The answers to these five questions will help you decide when to retire. If you end up not being quite ready, it's far better to know that before giving your notice. You can work a little more time, redouble your saving efforts, and make sure you're ready to fully enjoy life as a retiree before you leave work for good.