6 Signs You Aren’t Ready for Retirement and How To Get Ready

Editor's Note: This story originally appeared on The Penny Hoarder.

Being mentally ready for retirement is different from being financially prepared.

If you don’t have a solid grasp of your budget and a sound financial plan in place, retirement can be a disappointing experience. Imagine surviving on instant noodles and scraping by in your golden years — it doesn’t sound like fun.

Here are signs you’re not financially ready to retire.

Warning Signs You Aren’t Ready for Retirement

If you see any of these warning signs, use these tips to get ready for retirement.

1. Your Emergency Fund Is Dwindling

Broken refrigerators and leaky roofs can still happen in retirement, so make sure you’re financially prepared to handle them without putting yourself in debt.

“If your credit card has always been your backup plan for emergencies, then you are not ready to retire,” said Brock Westbrook, a Certified Financial Planner and manager of advanced markets at Country Financial.

He recommends having an emergency fund set aside, enough to cover at least three to six months’ worth of expenses, so that you’re prepared for any unexpected costs during your retirement years.

“The emergency funds need to be liquid, meaning they’re easily converted to cash without tax or penalties,” he added.

Stay on Track With Your Savings Goals

If your emergency fund is running low, it’s time to start intentionally putting a portion of your earnings toward it each month.

The best way to stay on track of your savings goal is by automating it. You can also consider selling some of your unused assets or taking on a part-time job to fill back up this pot of money.

And to prevent your savings from getting eroded by inflation, move some of it into a high-yield savings account that offers competitive APYs.

For example, the current APY of the Ally Online Savings Account is 4.35%, more than five times the national average.

2. You Have a Significant Amount of Bad Debt

Ideally, you want to retire debt-free. However, not everyone has the luxury of doing so, and that’s OK.

“There’s freedom in knowing that you can spend all your retirement income as you’d like if you’re debt-free, but having some debt (such as a home loan that may offer tax deductions) isn’t necessarily a bad thing,” Westbrook said.

However, he emphasizes that problems can arise when you still have a high level of debt — especially bad debt — when you retire.

“Industry rules of thumb suggest that your housing debt expense (principal, interest, insurance, and real estate taxes) should not exceed 28% of your pretax household income and that your total debt (housing debt plus auto loans, credit cards, etc.) should not exceed 36% of your pretax income,” Westbrook said.

Tackle Your Debt

If you’re struggling to keep your debt below those percentages, you’re probably not in a good financial position to retire.

Before saying goodbye to the 9-to-5 grind and enjoying your stress-free days in retirement, Westbrook suggests tackling high-interest debt by paying it down as much as you can while still maintaining minimum payments on the rest of your debts. This method is also known as the debt avalanche method.

Another common debt repayment method is the debt snowball method, where you prioritize paying your debt from the smallest balance to the largest, regardless of interest rates, then applying the payment once a debt is retired to the payment on next largest balance.

Both of these debt repayment methods are effective as long as you stay consistent.

3. You Spend More Than You Earn

Another sign you’re not ready to hop on a cruise ship and savor your golden years is if you’ve developed a habit of spending more than you earn.

“While employed, you may think you’ll always have the opportunity to make up for bad spending habits by getting a higher-paying job, getting that annual bonus or even getting a raise,” Westbrook said.

However, when you’re retired, these opportunities are no longer available.

“You have a set income and budgeted assets, and that’s it,” he added.

Perform a Financial ‘Dry Run’

To avoid experiencing money problems during your retirement, CFP Kendall Meade recommends that you perform a financial plan “dry run” before permanently leaving the workforce.

Here’s how it works: Let’s say you estimate that you only need $2,000 a month to survive in your retirement years. While still employed, do a trial run to see if you can live off this amount.

If you can’t, you may want to adjust your retirement budget or push back your retirement date to boost your savings before leaving the workplace.

Remember, spending more than you earn means you’re either dipping into your savings or incurring debt, and not nipping this bad habit in the bud could result in serious financial troubles down the line.

If you haven’t already, download a budgeting app to keep track of your spending so you know exactly how much money is going in and out of your pocket each month.

4. You Don’t Have a Financial Plan

If you don’t have a financial plan in place, you’re not ready for retirement.

“Not having ever done a retirement savings calculation using an online calculator like the FINRA Retirement Calculator is a major sign you’re not financially ready to retire,” said CFP Dr. Barbara O’Neill.

While going with the flow might work in certain situations, it’s not advisable when it comes to saving for retirement. Without a well-defined financial plan, you’ll likely encounter money issues in your golden years.

“It is very unwise to declare that you’re ready to retire without actually doing the math to see if you will have adequate savings and other income streams to cover projected living expenses for the remainder of your lifetime,” O’Neill said.

Start Your Retirement Planning

If you’re overwhelmed by the thought of developing a financial plan for retirement, work with a professional who can help evaluate all aspects of your financial situation, such as your cash flow, taxes, insurance coverage, and estate plan, and prepare you for retirement.

And if you don’t have the budget to work with a CFP, taking advantage of free retirement planning tools such as the FINRA Retirement Calculator can be a great place to start.

This calculator can help you estimate how much to save each year to have enough money to retire and live comfortably.

5. You Haven’t Budgeted for Health Care Expenses

According to the Fidelity Retiree Health Care Cost Estimate, a single person who retired in 2023 at age 65 would need approximately $157,500 saved (after tax) to cover health care expenses, and the average retired couple age 65 would need around $315,000 to cover health care costs during retirement.

Remember that these numbers have not taken into account other expenses like housing, food and transportation.

Some folks assume that Medicare covers 100% of your medical expenses once you turn 65. But in reality, it doesn’t. Like most other health insurance policies, you’re still responsible for out-of-pocket costs such as copayments, coinsurance and deductibles.

If you require frequent medical attention, these costs can quickly add up.

Find Ways To Fill Coverage Gaps

If you think you’ll need financial assistance with Medicare’s out-of-pocket costs, consider looking into Medigap plans sold by private insurance companies.

These Medigap plans are designed to fill your coverage gaps and help lower your health care costs.

And when in doubt, it never hurts to consult with a licensed health insurance agent to ensure you’re fully covered. After all, retirement should be a time to relax and enjoy life, not worry about medical bills.

6. You Have Insufficient Retirement Savings

If you haven’t prioritized contributing to your retirement accounts, such as a 401(k) or IRA, you may have to rely heavily on Social Security benefits during your golden years, which may not be enough to cover all your living expenses.

According to AARP, the Social Security Administration estimates that the average Social Security retirement benefit in 2024 will be $1,907 a month, and the maximum benefit — the most an individual retiree can get — will be $3,822 a month.

If you plan to retire in a city with a high cost of living like New York, Los Angeles or San Francisco, solely relying on Social Security might not work.

Know How Much Income To Replace

Most financial planners recommend replacing around 80% of your pre-retirement income to sustain the same lifestyle after leaving the workforce. In other words, if you make $120,000 per year before retirement, you’ll want to aim for at least $96,000 of annual income in retirement.

Another popular rule of thumb to help you figure out how much your retirement savings should be is the 4% rule.

This strategy dictates you withdraw 4% of your total savings the first year, then adjust that amount for inflation each following year.

By following this approach, your savings should last you at least 30 years. So, let’s say your annual budget in retirement is $60,000, your total retirement savings should be around $1.5 million, according to the 4% rule.

Don’t Rush Into Retirement

Sailing off into retirement when you’re swimming in debt, spending more than you earn, and lacking a sound financial plan can be disastrous — especially considering the rising cost of living and increasing health care expenses.

So, don’t rush into retirement unprepared to escape the corporate rat race.

Instead, take the time to work with a financial professional who can help you map out your finances and ensure you have enough to last throughout retirement.