Are you Financially Able to Retire?
Retirement is the pie-in-the-sky goal which many of us prioritize. It’s a milestone transition from a working life to hopefully one of relaxation and fulfillment of lifelong dreams. The coronavirus may have moved the retirement decision to the forefront for a lot of people. Maybe you’ve lost your job, or maybe during the mandated stay-at-home order you realized you would like to continue your stay at home. Whatever the reason, one of the most frequent and rewarding conversations we have as financial advisors is helping folks plan for what is possible in retirement.
Here are some basic questions you can ask yourself to help work through the big question: am I financially ready to retire?
1. How much will I spend in retirement?
There are some old adages floating around that try to make it easy to estimate how much you will spend in retirement, but don’t use them to try to estimate your expenses. One-size-fits-all solutions tend to not fit anyone all that well. Instead invest the time to do a budget either manually or through free tools like mint.com. Find out how you spend money now and estimate how those expenses will change in retirement.
What you spend on travel, home projects, medical, and clothes budgets are just some of the many items that likely will change. Organize your expenses by have to haves (housing, food, medical, etc.) and want to haves (travel, restaurants, sailboat, etc.).
Making a retirement budget is not easy and as life happens, it will have to be adjusted. That said, figuring out how much you will require to cover both your needs and wants in retirement is step one in building your retirement picture.
2. How much income will I receive?
You next add up all the sources of income you expect to receive in retirement. Those can include Social Security, part-time work, rental income, deferred comp plans and sometimes pensions. Ask for estimates from the places you expect to receive retirement benefits from.
The Bureau of Labor Statistics reports that only 12% of private industry workers participated in a pension type plan in 2019. For most, that means Social Security will be the primary source of regular retirement income. Don’t overlook, our least favorite family member, Uncle Sam, takes his cut of your income for taxes, even during retirement. The remaining after-tax cash flow to you each month is an important number when it comes answering the big question.
3. How much can I pull from investments?
A well-known rule of thumb is commonly known as the 4% rule. The basic premise is that if you are in a reasonably balanced portfolio (60% stocks, 40% bonds) and are in your mid 60’s, you can withdraw 4% of your starting account balance, adjusting the distribution annually for inflation, and have a reasonably low probability of running out of money during your lifetime. A quick Google search of the “4% rule” will show you all sorts of research in favor of it as well as problems with it, such as sequence of returns risk (risk of a large downturn early in the withdrawal phase), longevity risk (risk of living a very long time), return risk (risk of earning lower returns going forward then markets have in the past).
It’s not perfect, and like I mentioned previously, we typically do not like old adages, but this one is the exception in that I think it can give you a starting point. The caveat being that you may need to adjust it over time.
4. What adjustments do I need to make it work?
You should be starting to get a decent snapshot of your retirement picture by now. You have estimated how much you will need in retirement, and you have estimated how much you will earn in retirement. For some, those numbers look good, collecting more than you anticipate to spend, with a margin of safety in between. For others, there may be a gap requiring adjustments to make it work. Those adjustments may include spending less, retiring later, changing how you invest, or working part-time.
The key is to understand the trade-offs of any adjustment and prioritize what is most important to you. Is it worth it to work one more year to be able spend more on travel? Would you prefer to work full time for nine more months or part time for three more years? Every person’s situation will be unique and have different trade-offs. Understanding what it will take to make retirement work is an essential part of figuring out if you’re ready to retire.
Being on the verge of retirement is both exciting and stressful. You are about to realize the payoff for a career of hard work, but you have a slew of decisions you need to make. The time and effort it will take you to understand your full retirement picture is completely worth the effort. If you are getting started with this process, we invite you to download our free retirement checklist.
Most of our clients are either retired or about to retire, and we have helped a number of folks evaluate their retirement possibilities. We would be happy to meet with you for a 1 hour no-obligation consultation to asses your personal situation. Give us a call at 904-374-9098 or shoot an e-mail to firstname.lastname@example.org to schedule.