Retiring well and enjoying your golden years requires a lot more than just qualifying for Social Security. Social Security’s average retirement payment is only $1,503 a month, and that can leave a big gap between your monthly living expenses and the money that Social Security provides. In a world where everything seems to be continually changing, it feels impossible to know when you can afford to stop working and enjoy retirement. Whether you are in your 40s and are planning for retirement or are about to pull the trigger and live out your retirement dreams, these guidelines will help you decide when to put in your notice.
Look at the Whole Picture
Comprehensive retirement plans rely on two pieces of information. The first is a financial snapshot of where you are today. A detailed budget and account summary listing your debts, monthly obligations, income, savings, and investments will tell you whether you are on track to retire. Do not be embarrassed by what the numbers tell you and remember that more than half of Americans feel behind when it comes to saving for retirement. Regardless of how well prepared you are for retirement, getting an accurate sense of where you are is a critical first step in deciding how to reach a stable retirement.
The second step is to set up a budget that supports the standard of living you want in retirement. Retirees typically spend between 75% and 80% of what they spent during their working lives. Leaving the workforce means fewer commuting expenses, dry cleaning and other professional costs, and more time at home. Some retirees also have their homes paid off, which can drastically reduce living expenses. A word of caution to active retirees – retirement expenses can be higher during your earliest retirement years if you have extensive vacation and lifestyle plans. End of life care can also create unique and substantial financial requirements.
Understanding the streams of income you established to support a retired lifestyle is also critical. If you are among the few workers fortunate enough to have a pension, benefit from a larger-than-average Social Security benefit, or have cash-flowing rental properties, you will not need to save as much to support yourself during your golden years. Ideally, retirees will benefit from three independent income streams. These streams include private savings in 401(k) and Roth IRA plans, pensions, and Social Security. This classic approach to diversified retirement income is referred to as the three-legged-stool approach. Building your stool helps you stay safe and well-funded in retirement.
Do the Math
Conservative financial planners recommend withdrawing no more than 4% of your savings in your first year of retirement. That number is adjusted by the inflation rate every year from that point forward. Another simple way to think about this problem is to question whether you have 25 times your annual expenses in diversified investments. If you have that much set aside, you can retire without fear of running out of money in your old age!
If you are particularly conservative and want an added layer of protection, consider working a part-time job during the first few years of retirement. Even a low-paying part-time job will produce income that reduces your need to withdraw money from retirement accounts. Because the earliest withdrawals from retirement accounts create the highest risks of running out of money later in life, limiting these withdraws gives even the most pessimistic planner comfort.
Part-time jobs have other significant advantages for retirees. Besides keeping you active and engaged in the community, working keeps your skills sharp and your business contacts fresh. Deciding to re-enter the workforce is a lot easier when you do not have a 15-year gap on your resume!
Watch for these Red Flags
Regardless of what the math tells you, there are a few red flags that you should never ignore when it comes to deciding whether you are ready to retire. If either of these situations applies to you, seriously consider postponing retirement.
Using Savings to Pay Bills
You are not ready to retire if you are currently working and are living paycheck-to-paycheck or are dipping into retirement savings to cover monthly bills and other expenses. Retiring with heavy debt loads or significant financial obligations is a surefire way to strain even the best-made retirement plans. It also suggests that you do not have enough liquid savings or emergency funds. Getting yourself on a solid financial footing before retiring by paying off debt or building up some liquid savings is a great idea.
If you cannot keep working or need to drop to part-time, consider downsizing your home or moving to a lower cost of living area. Using the extra equity in your home to become debt-free and jump-start your retirement account balances will help immensely.
Forgetting Big Expenses
Retirees who only plan for typical monthly expenses are setting themselves up for disappointment. Savers often plan for food bills and utility payments, but how many consider replacement costs for cars, roofs, or major appliances? We all hope to spend 30 or more years in retirement, so the odds are high that you will need to cover some significant expenses. Factor those into your budget.
Knowing when you can retire will help you enjoy the time you earned through decades of hard work. Go ahead and give me a call, let’s figure out when you can reach your retirement goals!