4 Steps to Making Sure You're Ready to Retire

Retirement can be an exciting, enjoyable period of life if you prepare for it appropriately. Unfortunately, many people jump into retirement blindly, and thus wind up stressed out and disappointed after the fact. If you follow these steps, however, you'll help ensure that you're actually ready for retirement by the time that milestone rolls around.

1. Know what your living costs will look like

Many people assume that their living costs will drop drastically in retirement, but in reality, yours might largely stay the same or even increase in certain categories. Take healthcare, for example. The average 65-year-old man today will spend $189,687 on medical care in retirement, while the average 65-year-old woman will spend $214,565. Know what services Medicare will and won't cover, and plan for them accordingly.

Senior couple doing a puzzle
Senior couple doing a puzzle

IMAGE SOURCE: GETTY IMAGES.

At the same time, think about the lifestyle you want to lead in retirement and what it will cost. Will you own a home? Multiple vehicles? Will you live in a pricey city or someplace more affordable? Getting a picture of what your regular expenses will amount to will help you better plan for your golden years.

2. Understand how to assess your savings

It's not enough to just look at a number on a screen and call it a day, even if that number is seemingly pretty large. For example, a $500,000 IRA might seem like a lot of money, but how much annual income will it actually give you in retirement?

A good way to figure that out is to apply the 4% rule. The rule states that if you begin by withdrawing 4% of your nest egg's value during your first year of retirement, and you then tweak subsequent withdrawals to account for inflation, your savings should, in theory, last for 30 years. While it's not a perfect rule, it can help you determine how well your savings are likely to hold up once your golden years kick off.

Let's imagine you expect to need $45,000 annually in retirement, $20,000 of which will come from Social Security. That leaves you with a yearly $25,000 gap to fill. If you multiply $25,000 by 25 as per the 4% rule, you'll arrive at $625,000. Therefore, if you're sitting on a $500,000 savings balance, you'll know that it's not quite enough money to retire on -- even if it looks impressive at first glance.

3. Figure out when to file for Social Security

Your Social Security benefits are based on your top 35 years of earnings, but the age at which you file for them can cause that number to go up, go down, or stay the same. If you file at your full retirement age (either 66, 67, or somewhere in between, depending on when you were born), you'll get the precise monthly benefit your earnings history entitles you to. However, you're allowed to claim benefits as early as age 62 and as late as age 70 (technically, you don't have to file at 70, but there's no reason to delay past that point). The former move will reduce your benefits (most likely on a permanent basis), while the latter move will permanently increase your benefits.