Illness, job loss, or caretaking responsibilities force many people out of the workforce and into retirement. But some people have the choice but can't figure out when is the right time to retire. Many worry about living without a steady paycheck and spending down the money they have worked so hard to save. There are a lot of details that go into deciding an ideal retirement date. It requires a careful analysis of your finances to be sure that your assets are enough to support you during retirement.

If you are struggling, here are seven questions to ask yourself before you retire.

What will I do once I retire?

For many people, their identity consists of what they do for a living. Without the structure of a 9-5 workday, it is common for people to feel underwhelmed in retirement. Retirement will be more enjoyable if you are retiring to something you enjoy rather than retiring away from something. Before you retire, map out your time in retirement, whether it’s volunteering, traveling, or spending time with your family. Once you have mapped out what you want to do in retirement, you can figure out an estimate of how your monthly expenses would be. 

Here are some questions: Do you plan to live more frugally in retirement? Or, do you want to travel, take up new hobbies or engage in activities that might raise your cost of living?

Figuring out what you want to do in retirement will help determine how much you plan to spend and what kind of income stream you need.

Do I have enough to retire?

As a financial advisor, this is the most common question that I get asked when my clients are thinking about retiring. Many of my clients want to understand these two questions:

Will my assets produce an income stream that can support my ideal lifestyle?

How much do I need in retirement to pay for all my retirement expenses?

Most of the time, people haven’t figured out these answers because they haven’t determined their response to the first question. If you don’t know what you will accomplish in retirement, it is hard to know how much you will need. For example, a retirement filled with golfing and wine tasting will cost more than hiking or volunteering at a local nonprofit.

Using the basic assumption that you will live 25 years in retirement, you can estimate a 4% withdrawal rate per year.

How will I pay for health care?

Health care is one of the most significant expenses for retirees. Unfortunately, many people are underprepared for it. Likely, your current employer will not continue to provide health care coverage in retirement. If you are retiring before 65, you will have to consider how you will get health insurance coverage before Medicare kicks in. Depending on the company you work for and the length of your employment, you will probably have the option to buy COBRA insurance. However, these policies can be pricy and only last 18 months. Like COBRA insurance, private health insurance may provide sufficient medical coverage but are usually expensive for older adults. Depending on your income in retirement, you may be able to find more affordable options through the Affordable Care Act of health care in your state.

Remember that even are eligible for Medicare coverage, you can still have high out-of-pocket health care costs. According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple aged 65 in 2022 will need to pay $315,000 for medical care not covered by Medicare in retirement.

Long-term care also has the potential to derail your retirement. Someone turning 65 today has a 70% chance of needing long-term care sometime in the future. Consider how you will pay for long-term care with your current retirement plan. According to a 2021 Cost of Care Survey by Genworth, a private room in a nursing home costs about $9,034 per month. Medicare does not cover long-term care expenses. Unless you are eligible for Medicaid, you should consider long-term care insurance coverage or save money to self-insure.

What are my current liabilities?

The more debt you carry into retirement, the more money you will need to pay off what you owe, leaving you with less money to spend on things you enjoy. Before retiring, make a list a list of all your liabilities and determine how long it will take to pay them off. Paying off high-interest debt, such as credit cards, should take priority. If you have good credit, consider refinancing your home to a lower interest rate or paying off your mortgage during retirement.

Where will I live?

One of the most critical retirement decisions is where you want to live. Many people want to live in their current homes for as long as possible and age in place. If that is the case for you, consider whether you can continue to afford to live in your current home or should move to a smaller, more affordable place. If you decide to live in your existing home, determine whether it will suit you as you age and face more physical challenges.

Am I maximizing Social Security?

Social Security makes up the majority of many people's retirement income. According to CNBC, the average retiree receives 40% of their pre-retirement income from Social Security. According to the Social Security Administration, the average monthly Social Security benefit for retirees is $1542.22. There are several factors to consider to maximize your Social Security benefit.

The most crucial element is timing. If you decide to enroll at 62, before your full retirement age(usually around age 66 to 67), you will have a reduced benefit. If you wait beyond the retirement age, your benefits will increase by 8% per year until you reach 70.

The first place to start is by calculating your Social Security benefit online. Then, you can determine how much more you will need from savings and other sources of income to cover your expenses.

How will taxes impact my retirement income?

Unfortunately, taxes don't disappear when you stop working. Your tax bill might be worse in retirement. Up to 85% of Social Security benefits might be taxable if you have other sources of income in addition to your benefits. Plus, withdrawals from traditional IRAs and 401ks are taxable as ordinary income. So if you need $5,000 monthly for your living expenses, you may need to withdraw $6,000 to cover the tax bill. Plus, each state has its own rules for taxing your retirement income. A financial planner or an accountant can help you determine how your taxes will impact you during retirement and how you can reduce your tax bill.

About the Author

Danielle Miura, CFP®, is the founder of Spark Financials, a life and financial planning firm specializing in helping Sandwich Generation families manage their money. As a CERTIFIED FINANCIAL PLANNER™ professional, Danielle specializes in comprehensive financial plan development, financial education, and financial research.