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  • 1-Minute Article
  • |
  • Jul 27, 2018

Are You Financially Ready to Retire?

Help make sure your finances are prepared for the transition to retirement with these three questions.

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As your retirement date approaches, ensure finances are in shape for this next adventure. Use these three questions to gauge whether your financial foundation is ready to support your vision for retirement.

Question: Have you saved enough?


Experts suggest planning for about 70% to 85% of pre-retirement annual income to cover standard living expenses in retirement, such as the cost of food, housing, and transportation.1 However, this is a broad rule of thumb, and actual expenses can vary depending on personal circumstances. For example, housing expenses alone account for about 34.7% of spending — or $15,886 per year — for people over age 65.2 There are also important considerations, such as the rising cost of medical care – one study suggests that a retired couple needs $275,000 to cover healthcare costs in retirement, including premiums and deductibles for Medicare Part B, prescription drug coverage, and other out-of-pocket costs.3

Examine these and other expenses to create a personalized savings target based on your current annual fixed expenses — such as housing, food, and utilities — and estimated discretionary expenses like travel and entertainment. Also, remember to factor in potential unanticipated costs, such as medical expenses in retirement.

Next, calculate anticipated retirement income, such as potential Social Security benefits and income from savings and investments, and see if that projected income covers estimated expenses. If there’s a gap between expenses and savings, consider other ways to contribute to retirement accounts or build savings in other potential income sources.

For a detailed look at how to estimate potential retirement expenses and savings needs, read “Can I Afford the Retirement I Want?” then, talk with a financial advisor to help assess your situation.

Question: Do you have a retirement income strategy?


A retirement income strategy is a formal plan for combining savings and other sources of income into regular funds you can live off during retirement. The right strategy can help ensure you have income for life, while providing other benefits such as reducing taxes.

Retirement income plans typically draw from multiple sources, such as Social Security, retirement accounts like 401(k)s, and annuities. These income sources have different tax treatments, meaning someone’s tax bill might be higher or lower depending on the types of accounts they’re drawing income from.

To manage taxes efficiently, a retirement income plan can diversify withdrawals across different types of accounts and assets, potentially creating a lower overall tax burden. For example, an income plan might balance withdrawals from tax-deferred retirement accounts such as a 401(k)s — which are taxed at the individual’s income tax rate — with income from tax-free sources, such as a Roth IRA.

Each individual’s tax strategy will vary depending on his or her asset mix and financial situation. Work with a financial advisor to develop a strategy.

Question: Are you protected against the unexpected?


A strong retirement plan is one that’s prepared for potential surprises — such as market fluctuations or a large home repair bill. Fortunately, there are a number of options to help cover unexpected situations.

Annuities can add a measure of protection against market downturns. Depending on the type of annuity, this is done by cushioning a portion of the annuity's account value from market declines or by guaranteeing a minimum annual return or minimum level of income, regardless of market performance.

Guaranteed income payments can help cover regular retirement expenses, no matter how market volatility affects the value of other savings. Receiving regular income from an annuity can also allow people to leave other savings in place to pay for unexpected expenses, or to remain invested for potential growth to cover costs later in retirement.

In addition to benefits, annuities come with important considerations. For instance, money in the annuity may be tied up for a set period of time, providing limited access to funds. As a result, annuities may be a good complement to savings plans that already contain sources of liquid assets.

To help manage potential medical expenses, consider opening a health savings account (HSA), which allows users to save money on a tax-free basis to cover future medical expenses. Also, some permanent life insurance policies offer optional benefits called riders that can help cover expenses related to long-term care needs or chronic illnesses, such as home healthcare, assisted living, or similar services.

Permanent life insurance policies also can help cover other unexpected retirement expenses by building cash value that the policy owner can access through loans or withdrawals.

Adding safeguards like these to a financial plan can help people achieve their retirement goals and secure their future. Talk with a financial advisor about strategies to help fill any gaps in a retirement savings plan and protect against unexpected events.

To better understand different types of annuities and related terms, download our Quick and Easy Guide to Annuity Terminology.

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