6 Questions to Ask Before Retiring


Choosing a retirement date can be a decision filled with uncertainty and doubt. While you may be mentally and emotionally ready to step away from work, it’s difficult to know if you’re financially prepared to start living without a paycheck. How will you know when you’re ready? Here are 6 questions to ask before retiring.

1. Do You Have Cash Reserves?

Building sufficient cash reserves for emergency or liquidity needs is the first place to start when planning for retirement. The purpose of having cash reserves in retirement is twofold. First, in the event of an unplanned expense, cash holdings can allow you to leave your investments untouched. You can fix the car or replace the roof without making an unplanned dip into your retirement accounts.

The second purpose for holding cash reserves in retirement is for potential cash flow during a market downturn. If (or when) the market unexpectedly has a correction, instead of taking planned distributions from your investments, you can instead rely on your cash holdings for your living expenses. This allows time for your investments to recover.

In most cases, retirees should hold somewhere between 6- and 12-months’ worth of living expenses in cash. Mind you, we don’t expect huge returns from our cash holdings – what we give up in returns we make up for in safety.

2. Are Your Investments in Good Shape?

One of the key questions to ask before retiring centers around your investments. Are they properly allocated and diversified to support you for the rest of your life?

These days, it’s common for soon-to-be retirees to own large positions in a single company’s stock. Specifically, many people may have concentrated company stock from years of contributing to their company’s employee stock purchase plan (ESPP). Even though it may be a “good” stock, you still have a lot of eggs in just one basket.

Over time, it may serve you well to diversify into low-cost mutual funds or ETFs to reduce what is known as “idiosyncratic risk” – the risk of having too much money in one stock. After seeing the unbelievable performance of some stocks over the past year, this type of risk may catch some people off guard in the future. If you think back to the Great Financial Crisis, companies that no one could ever imagine going bankrupt did. General Motors and Wachovia are two that come to mind.

To prepare your portfolio for retirement, it’s also good practice to ensure that your mutual funds or ETFs have low expenses. Expense ratios continue to fall in an ever-increasing competitive landscape for retail investing firms. These days, companies such as Vanguard, iShares, Schwab, and DFA offer great mutual funds and ETFs with expense ratios barely above zero. You don’t have to pay a lot for great investment options.

3. Do You Have Plans for Health Insurance?

Healthcare costs have vastly outpaced general inflation over the last few decades. Do you have a plan? It’s probably no surprise to anyone this should be a critical question to ask before retiring.

If you’re retiring at age 65 or later, the solution is a bit easier; Medicare is already available. However, you may want to think about purchasing a Medigap policy to work alongside your Medicare coverage. These insurance policies are not overly expensive yet cover many of the expenses that Medicare does not.

If you’re retiring before age 65, then you’ll need to consider private health insurance unless your spouse is still working, and group coverage is available to you. In this case, you do have options, including COBRA coverage – which could cover you up until Medicare eligibility. Private health insurance through the ACA health insurance exchange is also available.

Those accustomed to group health insurance may be shocked to learn how expensive individual health insurance costs. These costs could potentially impact your retirement expenses negatively, as these additional portfolio withdrawals could put undue stress on your investments during the first years of retirement.

4. Do You Know When to Take Social Security?

Understanding when to take your Social Security is next on our list of questions to ask before retiring. While maximizing your Social Security benefits may not provide a massive benefit for most retirees, it can tip the odds of success a bit more in your favor. In my experience, I’ve typically seen a 1% to 3% increase in the probability of success after maximizing Social Security benefits using Monte Carlo simulations.

If you’re married, having one spouse apply for spousal benefits – and delaying their own retirement benefits – is the most common tactic to maximize Social Security. Every little bit helps. If you can improve your probabilities of success by a few percentage points, why not?

5. Do You Have a Plan for Aging?

Before retiring, it’s important to begin thinking about how you’ll pay for the costs of aging. As with health insurance, skilled home care and nursing home care expenses have vastly outpaced inflation. They’re also expenses that most of us will need, so planning for them is key.

For aging-related expenses, you can either self-insure by paying out-of-pocket or purchase a long-term care insurance policy. Since they were introduced, the premiums on these policies have risen to the point of being prohibitive, unfortunately. If you can afford the premiums, you can probably self-insure. Conversely, if you need the insurance, you may not be able to afford the premiums.

A recent option that has become more popular is a hybrid insurance product that combines a universal life policy with a long-term care insurance rider. As if insurance products weren’t complicated enough, this hybrid policy can be difficult to understand. However, it is a working option for those who want some peace of mind around aging-related expenses.

6. Do You Have a Financial Plan?

The final one of our questions to answer before retiring is: do you have a financial plan in place? While retirement is an event that occurs on a specific day, the circumstances of our life will change through the years. There will be twists and turns along the way that will require you to be flexible and adjust your plans. By having an ongoing relationship with an independent, fee-only financial planner, you can more easily anticipate and react to any changes in your retirement.

Let’s make sure that, if you retire, you only have to do it once.

If you’ve answered “no” to any of these questions to ask before retiring, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you plan for your retirement whenever you’re ready.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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