There can be a lot of anxiety surrounding retirement, especially when thinking about it a few years in advance. One of the biggest nervous-making questions is “am I ready to retire?” For some it might just seem like you’re taking a blind leap of faith, but it doesn’t have to be that unclear.
There are plenty of guides and tools online that can help you figure out if you’re ready to retire and they generally drum up to two questions, do you have debt? And do you have an income source (pension, 401k, investments, a sizeable amount in savings, etc.)?
Once you have those two concepts sorted, you can then start working on your overall retirement plan. If you’ve read our previous articles, you’ll know that one of the most important steps to retiring is having a plan. As you get older that plan should become clearer and clearer to the point where, when you’re 5-10 years from retiring, you should be able to estimate what that lifestyle will cost you. In this case that’s standard living expenses (such as your home, food, and don’t forget healthcare) and also any amount you want to set aside for your family. From there, well, you can just do the math! Do your monthly expenses cost more than your monthly income and your savings? Once you can answer that question, well, then you know if you’re ready.
But… Well… That question really isn’t THAT simple. This is where those retirement planning guides and tools come in handy!
Getting Data to Determine if you’re Ready
The best and easiest way to gather data concerning your retirement is to get a financial advisor. They are trained to dig deep into your financial situation and determine exactly what your retirement income will be and can then help guide you to achieving the plan you have set for yourself.
But, if you want to get started today, you can check out this tool from NerdWallet to calculate exactly what how much you’ll need in order to reach a specific monthly retirement spending goal: https://www.nerdwallet.com/investing/retirement-calculator.
All you need to do is fill in the information on the left. You can click “Optional” to add or change other details, such as your investment rate of return, the monthly retirement income you’re looking to have, and other factors. For example, if you have a pension or want to retire early, be sure to indicate that in the optional section. From there you’ll see if you’re on track to retire.
This calculator takes a few liberties concerning your savings. For one it assumes you’re investing whatever you’re saving, it also doesn’t include your social security, or any other retirement funds (like a 401k). You can add these individually, but it’ll most likely just be an estimate. In order to make the best approximation you should talk to a financial advisor who can take a closer look at your finances.
Calculating Living Expenses
Predicting the future is… well… Impossible. We can never be certain of exactly how much its going to cost to live in a decade, but we can make our best guess, and the closer you are to retirement age, the closer you’ll be to figuring out exactly how much everything will cost you.
The most set-in-stone living expenses are: your insurance, your property fees (mortgage, rent, tax, etc.), transportation expenses (car insurance, gas, plane tickets, etc.), and food. The things that are less predictable are: healthcare, entertainment, and emergency spending.
The average retiree spends around $50,000 on these expenses annually. So, aiming to have more than that set aside per year is key to making sure you’re set up for the foreseeable future. But, if you want to be as prepared as possible, you should estimate the monthly cost of each of these expenses and budget accordingly. By doing so, you can define the exact parameters necessary to retire.
The Controversial 4% Rule
You may have heard of the 4% rule before, but if you haven’t here’s the quick explanation: during your first year of retirement, you budget out 4% of your savings to put towards your expenses. The following year you withdraw another 4% plus the cost of inflation. This will make sure you’re covered for around 30 years of retirement (due to interest). The issue is, this is a very simple formula for a very complicated situation.
Some of the retirees I’ve interviewed for this series of articles have stated that they didn’t use a financial advisor or any calculator, but saved as much as they could and now live according to this rule. Some of them have pointed out that during the most recent recession, their investments didn’t do as well as they should have, leading to them actually losing money, they were luckily bailed out by the recent stock market boom, but there really wasn’t any predicting that could’ve been done there. Additionally, some of them have even stated that living like this forced them to cut back on their initial retirement plans, while others have said that it’s worked perfectly and will probably end up letting them leave a nice inheritance for their children.
The way I see it is that the 4% rule is a good way to quickly estimate how much you’ll have annually in retirement, but probably shouldn’t be your entire modus operandi. Use it more as a guessing tool than an actual rule.
However, it is ultimately up to you if you want to use the 4% rule as your guide. But I will state that of the 100+ retirees I’ve spoken to about finances, an overwhelming majority of them (around 70%) have stated that they were either glad to have talked to a financial planner/retirement counselor, or that they wish they had.
Knowing whether or not you’re ready to retire really comes down to cementing a realistic budget and sticking to it. You’re going to have to make some assumptions and factor a lot of risk into your plan. At the end of the day, it’s entirely up to you and you alone to sit down and figure out what you’re going to do to answer the question: am I ready to retire?