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Feb 26, 2008


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Joined Feb 26, 2008
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10 signs you're not ready to retire

Before you report for your last day of work, be sure that you've taken care of these details. You could save yourself a whole lot of money and regret later.
Can you rely on Social Security?
You may think you have enough money and a good idea of what you'll do with your time. You may even have dodged the ways you could blow your final years that I detailed in "5 ways to wreck your retirement."
But you're not really ready to retire if any of the following are true:
1. You don't have a budget. For most of your working life, trying to estimate your expenses in retirement has been a guessing game. It's hard to know, 20 or 30 years out, what your future life will look like.
As you bear down on retirement age, however, you should have a much better idea of your expenses and the income that is supposed to cover them. Although some costs should drop, such as work clothes and commuting, those savings may be more than offset by increased spending on travel and hobbies.

Consumer Reports has a worksheet to help you detail your pre- and post-retirement expenses. (Your investment income shouldn't exceed 4% of your portfolio -- more on that in a minute.) If your post-retirement expenses exceed your expected income, you'll need to work to trim them or plan on working longer to boost that income.
Consumer Reports also recommends that you try living on your retirement budget for a few months to make sure it actually works before you stop working.
2. You're expecting to live on interest and/or dividends. If you're really rich or you plan to live like a monk, this might work. But yields have fallen by about half in the past 20 years, and many companies cut their dividends during the recession. In today's world, most of us need to discard the idea that we can't touch our principal or that we can put all of our money in low-earning investments.
Let's take that latter idea first. Sticking to low-risk investments such as certificates of deposit and Treasury bonds may give you a feeling of safety, but that's an illusion. Eventually inflation will return, eroding the value of those investments and your spending power. Even a 3% inflation rate will cut the buying power of a dollar in half over a 20-year retirement. You'll need at least some exposure to stocks if you want to overcome that erosion.
As for never touching principal -- well, most of us won't have saved enough for that to be an option. We'll have to spend down our principal over time if we want a decent standard of living. What you don't want to do is drain your retirement funds too fast. Your initial withdrawal from your retirement funds shouldn't exceed 3% if you're in your 50s or 4% if you're in your 60s, according to studies by mutual fund company T. Rowe Price. The company's retirement income calculator can help you see whether your withdrawal rate is sustainable, given your investment mix.
3. You haven't road-tested your dreams. I recently encountered a couple who moved from California to a small city in Washington state. On paper, the community looked ideal: Housing was less expensive, good health care was accessible, and the area was loaded with golf courses (golf was a particular passion of this couple). But golfers in the Pacific Northwest have to like, or at least tolerate, playing in the rain, and this couple emphatically did not. In the abstract, they thought they could handle wet weather; in reality, it made them feel trapped.
Experts on relocation in retirement recommend spending a long vacation or two at your proposed destination to make sure it's a good fit. If you're planning to move to a different climate, try visiting in the most difficult season -- August in Arizona, for example, or December in Duluth, Minn. Road-testing your dream is also essential if you're contemplating a new career, such as running a bed-and-breakfast in retirement.
At the very least, you should talk to other people who have done what you want to do and "learn from them what it takes, the joys and difficulties, what it's like on a day-to-day basis," said financial planner Ed Jacobson, the author of "Appreciative Moments: Stories and Practices for Living and Working Appreciatively."
"It's always good to test one's dreams or fantasies," Jacobson said. "It's far better to benefit from the information, experience and acquired wisdom of those who have preceded us on the path we're contemplating in retirement."
4. You don't know the optimum time for Social Security benefits to begin. I discussed the importance of understanding spousal Social Security benefits in "5 ways to wreck your retirement." But the big question for any retiree, married or not, is when to start benefits. Many people will want to delay their start date as long as possible, to increase their checks and those of their surviving spouses, but starting earlier may be wise for those with severe health issues who may not live long enough for the delay strategy to pay off.
"The choice of when to start receiving benefits determines how much you'll be paid each month for the rest of your life and also the amount your spouse will receive as a survivor," said Bob Carlson, the editor of the website Retirement Watch and a co-author of "Personal Finance for Seniors for Dummies." "The wrong choice can shortchange you and your family by thousands of dollars over your lifetime."
For more, read Carlson's book and "The best age to start Social Security."
5. You don't know how your medical expenses will be paid. Medicare doesn't kick in until you're 65. Few employers offer retiree medical benefits, and those that do are steadily reducing the coverage, Carlson notes.
If you retire earlier without coverage, you'll have to figure out how to pay for health insurance on your own. A couple in their late 50s or early 60s could pay $1,000 or more a month for health insurance, assuming they can qualify for individual coverage.
"Even at 65 and later, you must choose between traditional Medicare and Medicare Advantage," Carlson said. "If you choose traditional Medicare, do you also want a Medigap policy and a Part D prescription drug policy? Under all the options, you'll also need a way to pay for premiums, deductible, co-payments and care that isn't covered."
You can get started understanding your options with "Your 5-minute guide to health insurance," "What to know about Medicare -- now" and "How to pick a Medicare drug plan." And once again, I'll recommend Carlson's book, co-authored with financial planner Eric Tyson, as an invaluable primer to the money challenges of your retirement years.
6. You haven't coordinated with your spouse. Financial planner Stuart Ritter of T. Rowe Price met with a couple shortly after the husband's last day at work. The husband assured Ritter the couple would be fine financially because the wife was going to work for five more years. "I never agreed to that!" the wife hollered from the kitchen.
Anyone who's married won't be surprised to hear there was a miscommunication: Although they had discussed her working an additional five years, she thought it was optional while he thought it was their plan.
Another couple I know found themselves at an impasse because he assumed they both would retire at the same time to travel and enjoy their post-work life, but she was reluctant to give up her job for 24/7 couple time. "I think he'll drive me crazy if we're around each other all the time," she confided.
How long you'll work, where you'll live, what you'll do -- all these need to be the subject of honest discussion. The takeaway here: Talk it over, and be clear on the plan before either of you makes a move to quit or reduce hours.
7. Your mortgage won't be paid off. Not everyone needs to sail into retirement owning his or her home free and clear. But it's a smart idea for most households because:
  • It reduces your monthly costs, which in turn reduce how much you need to have saved for retirement. Figure every $500 in monthly expenses you can trim means you need to save $150,000 less (assuming a sustainable 4% withdrawal rate) to fund your lifestyle.
  • In reducing how much you need to pull from your retirement accounts, you also may reduce your tax bill, because withdrawals from deductible individual retirement accounts and 401k's will be taxed as regular income in retirement.
  • The tax advantages of a mortgage are usually minimal, if they exist at all, by retirement age. You're paying mostly principal in the last few years of your mortgage, so many borrowers find they no longer pay enough interest to itemize their deductions and get a tax break.
For more, read "Good time to shorten your mortgage?"
8. You have credit card debt. Nearly one out of three households (31.9%) headed by someone aged 65 to 74 had credit card debt, according to the latest Federal Reserve Survey of Consumer Finances. So did almost one out of four households (23.5%) headed by those aged 75 and up. The prevalence of credit card debt among older Americans helps explain why bankruptcy rates for people 65 and over rose 150% between 1991 and 2007, according to the Consumer Bankruptcy Project. Filings for those 75 and older rose a stunning 433%.
Carrying credit card debt indicates you're living beyond your means, which can quickly become disastrous when you're on a fixed income. But the discipline required to pay off credit card debt (budgeting, trimming expenses, etc.) will serve you well in your later years when you can't simply volunteer for overtime to cover unexpected bills. If your debt is so great you can't pay it off within five years, consider calling a legitimate credit counselor and a bankruptcy attorney to discuss your options
9. You're still supporting your kids. Some of the saddest e-mails I get are from parents whose adult children have sucked them dry financially. The parents either can't retire or have run out of cash to live on because of their spoiled kids' endless demands for money -- and the parents' inability to say no.
Unless your offspring are truly special-needs and require your lifelong support, they should have long since been booted off the parental dole. If not, you need to read "Will kids drag you to the poorhouse?" and "Should parents bail out their kids?"
10. You haven't scam-proofed your funds. Bernie Madoff wasn't the first scam artist to devastate retirees' funds, and he won't be the last. If you use an investment manager, make sure your money is held at a name-brand, third-party custodian with Securities Investor Protection Corp. insurance, said financial planner Bonnie Kirchner, who wrote "Who Can You Trust With Your Money?" after her ex-husband, Brad Bleidt, was jailed for running a Ponzi scheme.
"Don't just take your adviser's word for it," Kirchner said. "Call the custodian directly and verify your account numbers and balances."
Also, don't hire someone to help you based solely on friends' recommendations (that's how most Ponzi schemers rope in their victims) or the fact that they have a radio show or other media "presence," advises Charles Jaffe, the author of "Getting Started in Finding a Financial Advisor."
Advisers can buy airtime or get quoted without being vetted by anyone, Jaffe notes, which is why it's important to do your own background checks. Read Jaffe's "7 mistakes to avoid when hiring a financial adviser" and my "8 things your financial planner won't tell you."
Then, as you go forward into retirement, keep in mind that if it sounds too good to be true, it almost certainly is.
"Don't fall for investment 'opportunities' which tout consistently high rates of return," Kirchner said. "If you are hiring a professional to assist you with your retirement investing, you should have a basic understanding of how your money is invested and why. Do not accept vague explanations, especially about 'secret strategies' à la Bernie Madoff."

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