What We'll Cover
- A few rules to help you determine your financial needs for retirement
- How to calculate your net worth
- What financial things to take care of before retirement
- How to create a budget for retirement
With over 300 days of sunshine per year, world-renowned golf courses and some of the best healthcare in the country, Arizona is one of the most popular places to retire in the U.S.
In addition to being tax-friendly, Arizona boasts affordable housing options. And with the Mayo Clinic, Banner Healthcare and Cancer Treatment Centers of America all calling Arizona home, it’s no wonder why so many retirees flock to Arizona for the next chapter of their life.
Arizona is also full of world renowned golf courses sprinkled all over the valley of the sun and throughout the entire state. And for those who love the outdoors, Arizona is home to some of the best hiking in the country accompanied by the most beautiful landscapes and sunsets in the entire world.
But before you pack your bags and head to the Grand Canyon State, consider these 10 steps to preparing for retirement in Arizona.
Retirement Number Rules
Although Arizona is one of the more affordable places to live in retirement, it’s important to know your numbers to see how far your retirement dollars will go once you get here.
Here are a few different rules you can follow when determining how much you need in retirement to live as close to the same lifestyle you have today.
The 4% Rule
The 4% rule represents how much you can withdraw from your nest egg each year to not only live throughout retirement but maintain your nest egg so it never goes down in value.
The principle behind the 4% rule is that you place your retirement nest egg into a financial product that yields at least a 4% return per year and limit yourself to withdrawing no more than that amount each year.
For example, if you set aside $1 million for retirement and it earns a 4% return each year, then you could draw $40,000 per year without your nest egg ever losing value. $2 million would be $80,000 per year, $3 million would be $120,000 per year, and so on.
The 25x Rule
The 25x rule helps you determine how much you need to have saved in retirement to provide the income you'll need.
Simply take your yearly spending and multiply it by 25 to get the size of your nest egg.
For example, if you’re looking to retire with an income of $50,000 per year, then you’ll need to have $1.25 million set aside at retirement. For $80,000 per year, you’ll need to set aside $2 million.
The 80% Rule
One of the newer retirement rules financial experts are suggesting is the 80% rule, meaning 80% of your current gross income is what your retirement income should be.
This is based on retirees having lower expenses in retirement. With lower income taxes, subsidized healthcare, and no longer contributing to retirement savings, financial experts estimate that the majority of retirees will only need up to 80% of their gross working income when they are ready to retire.
For example, someone earning $100,000 per year should only need $80,000 per year to retire with the same lifestyle they were accustomed to living during their working years.
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Retirement is not an age, but a number
Now that you know how to determine your retirement income using the 4% rule, the 25x rule, and the 80% rule, you can lean on a retirement number instead of a retirement date.
Instead of looking at retirement from a date on a calendar, look at retirement from the perspective of a number you will need to get to. Ask yourself how much you’ll need to live on each month and then determine how much you’ll need to have saved to maintain that monthly amount.
The best piece of advice we can give you to help you find that number is to work with a good financial advisor to help you understand your numbers and how to reach them.
10 Steps for Retirement in Arizona
Keeping the retirement number rules above in mind, here are 10 steps to take to retire in Arizona.
1. Calculate your net worth.
Before you push the retirement button and head for Arizona, it’s important that you know exactly what you’re entering retirement with.
Although calculating your net worth seems like a daunting task, you can do it easily with a yellow pad and some 5th-grade math.
First, add up all of your assets – or everything you own.
This includes all of your stocks, bonds, mutual funds, ETFs and the value of all of your real estate, including your primary residence. Any cash you have saved and the value of anything else including vehicles, jewelry, gold, or anything else of value would be included as an asset.
Next, add up all of your liabilities – or the things you owe.
For most people entering retirement, this typically includes the balance of your mortgage or any other debt you may have.
Lastly, subtract the total of your liabilities from the total of your assets to determine your net worth.
For example, $1.5 million in assets with $300,000 in liabilities would result in a net worth of $1.2 million.
2. Build your emergency fund while you’re still earning income.
To determine the size of your emergency fund, you’ll first want to know how much your emergency expenses currently cost. These include expenses that would still need to be paid during a financial emergency, such as your rent or mortgage payment, utility bills, insurance premiums, money for food, water, clothing, and gas for your car.
Once you determine the amount of your monthly emergency expenses, multiply that number by six. This will give you six months worth of emergency expenses for a fully funded emergency fund.
For example, if your monthly emergency expenses add up to $3,000 per month, then you’ll build your emergency fund to $18,000 prior to hitting retirement.
It's important to have immediate access to your emergency fund. This means setting your emergency fund aside in a savings or money market account where you get same-day access to your funds without imposing any kind of early-withdrawal penalty.
3. Pay off all debt.
There are many different ways to pay off your debt, but the favorite among most financial experts is the debt snowball method.
To set up the debt snowball method, line up all your debts from smallest to largest balance, while also ignoring interest rates. Then, make minimum payments on each debt and throw every extra dollar you have at the first (smallest) debt on your list of debts.
Once you pay the balance in full of the smallest debt, your minimum payment and any extra you were paying towards that first debt is snowballed over into the next debt on your list. Each time you pay off a balance in full, the snowball payments continue to roll into the next debt on your list.
By the time you reach the last debt on your list, you’re making a very large payment each month which will knock out that debt quicker than you could have ever imagined before.
4. Determine your health insurance costs before you retire.
If you plan on retiring before age 65, you’ll be on the hook for some jaw-dropping healthcare premiums – especially if you currently have healthcare through your employer.
To put things into perspective, an Arizona couple who retires before age 65 will pay between $1,500 and $2,200 per month for Arizona healthcare premiums.
However, at age 65, Medicare kicks in and drops the monthly premiums to between $174 and $332 per month.
5. Create a retirement-life budget.
When it comes to creating a budget for your retirement, you first need to identify what your future retirement income will be.
Whether you have a pension, social security income, rental income, or any other income, add everything up to create a monthly income amount.
Next, set up your budget by subtracting all your monthly expenses from your monthly income amount. This includes all your monthly fixed expenses, such as mortgage, rent, insurance premiums, utilities and any other recurring expenses.
Then determine how much you have left for groceries, entertainment, travel, and any other expenses that you foresee in retirement.
By creating a monthly plan for your money before you retire, you avoid the unexpected expenses that can sneak up on you in retirement because you didn’t prepare for them.
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6. Have a good tax strategy.
Many retirees forget to plan for things such as the required minimum distributions (RMDs), which are forced withdrawals the IRS makes you start taking when you turn age 73 (2023 IRS rules).
Required minimum distributions is the amount of money that must be withdrawn from pre-tax retirement accounts in order for the IRS to tax your retirement savings. Creating a plan for how and when to withdraw your savings can result in huge tax savings if done properly.
Other considerations to factor in when creating a tax strategy in retirement is understanding your medicare income limits and making ROTH IRA conversions before you start collecting social security.
7. Understand and utilize annuities.
As we mentioned above, the 4% rule is taking 4% of your nest egg, living off the interest, and keeping the value of your nest egg intact while taking withdrawals. The tool financial experts are using to make this 4% rule a reality is an annuity, which behaves similarly to a pension.
An annuity is a financial product that you can purchase from a bank, credit union, life insurance company, or any other financial institution. You can purchase an annuity with one lump sum payment or with a series of payments if you choose.
The money you place inside the annuity grows without paying any taxes on the earnings until you start making withdrawals. Once you start making withdrawals, you’ll be taxed on the withdrawals as ordinary income.
Annuities are one of the favorite choices when it comes to retirement planning because it allows retirees to turn their nest egg into a pension, which can last for many years or even for the rest of their life.
8. Determine when to take social security.
In 2023, age 62 is the magic number when you can start collecting social security. But this age might not be the best choice for everyone.
Delaying social security income can have huge upsides to it. For example, those who choose to delay collecting social security until age 70 can see an increase in social security benefits by nearly 75%!
There isn’t a magic formula when it comes to determining the age to collect social security because there are many factors that go into it. You'll need to consider your current overall health, your ability to keep working longer, and your expected life expectancy for maximizing your social security benefits.
Social security benefits stop increasing at age 70. You don’t have to collect social security by age 70, but your benefits stop increasing once you turn 70.
9. Get long-term care insurance.
According to Fidelity, a couple retiring today needs to have saved $300,000 to simply cover medical expenses in retirement. This is an 88% increase since 2022, which also gives us insight to what healthcare costs could be another 20 years from now.
Keep in mind that Medicare doesn’t pay for everything. Of course there is the option for Medigap – policies purchased from private insurance companies to cover the “gap” in coverage between what Medicare doesn’t pay and what you are on the hook for. These typically cost retirees $150 per month for each individual.
But there’s another lingering cost in question: long-term care.
According to LongTermCare.gov, 65-year-olds today have a 70% chance of needing long-term care and 20% of those will need it for five years or longer.
Another important thing to note is that the cost of long-term care insurance increases the longer you wait to purchase it. Since long-term care is inevitable for 70% of Americans, making the effort to purchase long-term care prior to retirement would be a wise financial decision prior to retirement.
10. Start estate planning and leave a legacy.
Everyone should have an estate plan, especially those planning on retiring soon. Estate planning is creating a plan for everything you own — your home, your car, any real estate you own, investments, life insurance, cash, and any other possessions you have.
By creating an estate plan, you outline how you want your wishes to be carried out. Everything you own is dispersed as per the estate plan you created well in advance.
This helps alleviate problems that often happen when dividing up a person’s estate without a proper estate plan.
In addition, estate planning can be a great way for those who have accumulated wealth to preserve wealth well beyond their lifetime.
Key Takeaways
- Use the 4%, 25x or 80% rule to determine your financial needs for retirement.
- Create an emergency fund and pay off all debts before entering retirement.
- A financial advisor can help you determine your retirement numbers and assist you with planning your tax strategy.
- Make an estate plan to preserve wealth beyond your lifetime.
Whatever age you feel ready to make this transition, ensure that your retirement number is intact so you can easily move into this rewarding chapter of your life.
By Chris “Peach” Petrie,
Founder of Money Peach
Chris “Peach” Petrie is the founder of Money Peach. Money Peach partnered with OneAZ to provide free financial education to members across the state. To learn more about OneAZ’s partnership with Money Peach, click here.
APR = Annual Percentage Rate
