The road to retirement requires a lot of time and consistency. If you started working at age 22 and retired at 67, then you will have prepared for this moment for 45 years. Hopefully, you’ve stayed the course, and your diligence has reaped a healthy nest egg. But is it enough? How can you know when you are ready to retire? The answer, as with most financial matters, depends on your situation and preferences. There’s a good chance you’ll need to be financially independent for a quite a while after you stop working. A healthy, upper-middle-class couple who are 65 today have a 43 percent chance that one or both partners will live to see 95. Given that retirement today is such a significant part of life, here are a few questions you should make sure you have answered to know when you are ready to retire.
How much money will I need in order to retire?
When you’re considering how much money you will need to retire, it comes down to two factors: necessities and lifestyle. Necessities are what you will need to live day to day. Expenses like groceries, utilities, housing payments, and medical costs are necessities. Lifestyle expenses are based on the premium you place on your necessity expenses along with the amount of discretionary spending for activities you enjoy. Do you plan to eat inexpensively by cooking 6-7 times a week, or would you like to eat out often? Will you downsize your home and live without a mortgage, or will you be comfortable with continuing in your current home and possibly maintaining some housing debt? Travel is a very common lifestyle expense choice during retirement, as many people have dreams of seeing the world when they retire.
There are several methods that you can use to calculate how much your lifestyle and necessities will cost you in retirement, and consequently how much you should save. As a general rule, most people can expect to spend 70-80% of their current income during retirement. This is a very general rule and may not fit well for those with high incomes ($200K+). Another general rule is that a retiree should be able to withdraw about 4% annually (inflation adjusted) from their retirement funds and never run out of money. There are several retirement calculators you can use to get a more precise estimate of the amount of money that you will need to have saved by the time you retire:
The best method of estimating how much you will need in retirement is to sit down with a retirement consultant or financial professional. They can ask you questions about your current situation and expected retirement lifestyle so you can craft financial goals that fit your retirement ideal. An objective third party, who is an expert in retirement planning, may also identify essential expenses that you have not previously considered.
What are my income streams and how much income will I have during retirement?
Saving enough money is a top priority before retirement, but it’s not the only priority. A well-structured retirement plan will have not only a “nest egg” of savings but also income generating assets. Your most crucial income generating asset should be your personal investments from retirement savings accounts. As stated previously, you should be able to draw on 4% of this per year to sustain it. Other common income streams include social security, pensions, annuities, and any income from trusts or family-related finances such as a family business. You should know how much income these assets will be putting out, and how that fits into your long-term budget.
Most of these forms of income can only be drawn on at a certain age or after participating in a program for a defined amount of time. The terms for drawing income from pensions and annuities depend upon the terms of the agreement; however social security has defined rules regarding when and how much you can draw on it. You can begin to draw on your Social Security funds at age 62, however, if you decide to do that you will only receive 70% of the benefit. That amount increases until you reach the official retirement age of 67, at which point you are in entitled to 100% of the monthly benefit.
You should also consider your ability to generate income through contract, hobby or part-time work. Work and skills that can be sold on a contract basis include accounting, copyrighting, designing arts and crafts, or consulting can be an important income source in retirement. While working post-retirement can sound distasteful, early-on it can be a good transition from full-time employment, and it can also serve as a way to continue to pad your savings if you aren’t quite at an ideal level.
What debts do I have?
Having a comfortable retirement can often depend on not having to battle too many expenses that will drain your resources. Ideally, its best to retire with as few debts as possible. Take account of all the debts that you hold in your household. The largest ones usually are a mortgage, car loans, and remaining education loans. Being at a place where these debts are at a minimum is the ideal situation in retirement. Also, consider personal loans and consumer debt. If you have any issues with consumer debt, which often comes with very high interest rates, then have them paid off completely before you consider retirement, as debt with such a high level of interest can be very costly and could put you in a difficult financial position without employment.
If I’m not ready yet, what do I need to do to start preparing?
Let’s take a review of what you should consider prior to retiring:
- Expenses: How much money will I need in retirement?
- Savings: How much money have I invested and saved up for retirement?
- Is it enough to last my entire retirement?
- Income: What will be my income streams in retirement?
- Debts: What debts do I have?
If you don’t know the answers to these questions, then you’re not financially well prepared for retirement. If you don’t know how to get to these answers, or if you need someone to double check your plans, then getting a good financial professional or retirement counselor is a great move. Having a competent guide at your side, such as a Trust Point financial professional, can help you map out a plan to get you on the right path to retirement. It’s never too late, or too early, to start considering your retirement goals! Contact us to see how we can help.