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2. You can live on your retirement budget
Needing to be financially ready is a no-brainer.
Expenses may drop in retirement, but not as much as you might think. That's why crafting a post-retirement budget and living off that budget for six months before you retire can help you decide whether your budget is realistic and whether you can stick with it.
Treat this exercise as a serious trial run, says Amy Rose Herrick, an investment adviser in St. Croix, U.S. Virgin Islands. "If you can't do this for six months without raiding savings or tapping credit cards to live, you are not ready yet," she says.
To put that post-retirement budget together, you need to understand what your cash flow will be like after retirement, says Helen Hogan, an investment adviser with Securities America Advisors in Red Bank, New Jersey.
"How much money do you need every month, including the quarterly and annual expenses, the unexpected and hidden expenses?" she asks.
It's important to factor inflation into your budget, says Jamie Patrick Hopkins, an associate professor of taxation at The American College of Financial Services in Bryn Mawr, Pennsylvania. "Inflation is low now, but it could easily go up to 5 percent," he says. "Fifteen or 20 years of that type of inflation can really eat into savings and increase expenses."