These 5 steps can help you become retirement-ready

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How can you tell if you’re truly ready to retire, both financially and emotionally?

The answer might surprise you, according to Jeremy Keil, a certified financial planner with Keil Financial Partners and author of “Retire Today.”

“I don’t know if you can ever truly tell you’re ready for retirement,” Keil said in a recent Decoding Retirement podcast. “But I will tell you that virtually everyone who is retired, they say, ‘Go ahead and do it.'”

From a financial standpoint, Keil said that you’ll want to have at least half a million dollars saved to securely retire in America. But retirement readiness goes beyond money.

“Many people are financially ready but not ready from a confidence or identity standpoint,” Keil noted. “Planning increases confidence. If you go through a thoughtful retirement planning process, you’ll feel much more ready to retire.”

In the podcast, Keil walked through the five steps in his book for building a secure retirement plan. His advice: Work with someone who has helped retirees from your employer or industry. They’ll know the common pitfalls and help you avoid costly mistakes.

Step one is understanding how long you need your money to last. While estimating your own lifespan is one of the most challenging aspects of retirement planning, it is essential.

“Step one combines how much you spend with how long you’ll be in retirement,” Keil said. “Everyone focuses on how much, but not on how long. People treat life expectancy like a guaranteed age of death. They say, ‘My life expectancy is 80, so I won’t live beyond that.’ But statistically, you’ll die at your exact life expectancy less than 4% of the time.”

Keil recommended using tools such as longevityillustrator.org, which was developed by the Society of Actuaries and the American Academy of Actuaries.

The tool provides a personalized longevity estimate and a probability curve. Life expectancy is the midpoint — half will die before, half after, Keil noted, adding, “A good retirement plan considers the full range of possibilities.”

Keil also advised against using age 90 or age 95 for your planning horizon.

“Ninety percent of people are not dying at one of those two specific ages,” he said. “It takes five minutes to … get your own personalized longevity estimate. It’s wildly different whether you’re a smoker or not a smoker, if you’re in great health or not great health, if you’re male or female.”

At a minimum, he said, planners should use different ages for men and women. “It’s your whole lifetime ahead of you. Take five minutes to get an accurate number.”

Keil also recommended optimizing your Social Security benefit, which only 4% of beneficiaries do.

“Couples lose about $180,000 in lifetime benefits by not maximizing Social Security,” he said. “I’m not going to tell you everyone should file at age 70, but what I want to give you is a rubric of how should you approach your Social Security decision.”

Keil outlined three questions that those nearing retirement should ask themselves about Social Security: How does this help me in old age? How does this help my survivor? How does this act as insurance in case I live longer than expected or if the markets or inflation surprise me?

Keil stressed that Social Security should be treated as a household decision, not an individual one.

Too often, couples focus on maximizing the check they receive today rather than the income one spouse may need decades from now. Delaying the higher earner’s benefit to age 70, when possible, can provide meaningful protection for the surviving spouse.

Read more: How much do you really need to save for retirement?

To help couples evaluate their options, Keil said he relies on planning software such as Income Lab, which illustrates dozens of possible filing combinations. The analysis often shows that delaying the higher earner’s benefit provides the most significant long-term advantage.

Another rule of thumb he suggested is to imagine both spouses file at the same age, then shift the lower earner to claim three years earlier and the higher earner three years later. The household income stays the same today, but the survivor benefit increases substantially.

“You can’t guarantee you’ll pick the right stock,” he said, “but you can guarantee that the way you file for Social Security will add or subtract from your net present value.”

Keil also recommended thinking strategically about taxes — and that means paying the lowest taxes across your lifetime, not the lowest taxes today.

“During your working years, you had little tax control,” he said. “In retirement, you have enormous control. You can choose the year and month you take distributions and choose from which accounts — bank, brokerage, traditional IRA, or Roth IRA.”

Most retirees, he said, have years when they are in a low tax bracket.

“Use those years to intentionally realize income through Roth conversions,” Keil said. “Pay taxes at low rates to avoid paying higher taxes later. Planning ahead gives you that control.”

Investing wisely during retirement is the fourth step in Keil’s plan of action.

Many retirees assume they should reduce their stock exposure as they age. But Keil has a different point of view.

“Retirement doesn’t mean you no longer have long-term money,” he said. “If you retire at 62, … [you or your spouse] might be alive at 92. That’s a 30-year time horizon. Your 30-year-old self would have invested for the long run — that principle still applies.”

That’s why Keil said he’s a fan of the bucket strategy.

“The money you’ll need in the next one to five years should be in short-term investments,” he said. “The rest can stay invested for the long term.”

Read more: Retirement planning: A step-by-step guide

Step five involves managing and mitigating three major risks retirees might face in retirement: living too long, dying too soon, or becoming too sick.

“If you live too long, you might run out of money,” Keil said. “If you die too soon, your spouse may face financial hardship, especially if your decisions reduce survivor benefits. And if you live a long life, your health may decline, which increases costs.”

Good planning considers all three.

You need to think through the basics of long-term care, Keil said, including where you want that care to take place, who will be responsible for providing it, and how you plan to pay for it.

Funding options might include insurance, personal savings, or what Morningstar’s Christine Benz describes as a long-term care fund, where a specific portion of your portfolio is set aside for future care needs.

“Whether or not you buy long-term care insurance, you still need a long-term care plan,” Keil said.

Got questions about retirement? Email Robert Powell at [email protected], and we’ll do our best to answer it in a future episode of Decoding Retirement.

Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service.