I can’t count the number of times I’ve been asked this question.
It usually goes something like this, “Tyler, I’m “x” years old and I have “x” dollars in my 401(k). Do you think I can retire?”
I certainly understand everyone’s desire to want a quick yes or no answer, so I’ve put together a short list of 3 questions you need to ask yourself if you’re thinking about ditching the 9 to 5 any time soon. With that said, even though these questions are helpful and are some of the more crucial ones to ask when determining whether or not you can retire, they’re not a “magic bullet” by any means.
Just something to keep in mind as you read the rest of this post.
1. How much money will I need in retirement?
At a minimum, you need to put some numbers on paper so you can get a rough idea of how much you plan to spend while in retirement. If you’ve never used a budget or spending plan before, that’s OK, this is a perfect time to start.
The Financial Planning Association (FPA) has put together a great resource to help you plan and compare your current spending with your anticipated spending in retirement. You can download a free PDF file of this worksheet by clicking here.
A lot of people rely on rules of thumb, such as “you need 70-80% of your pre-retirement income.” But since everyone’s “thumbs” aren’t the same size, we shouldn’t all rely on the same rules. In fact, your income has nothing to do with how much you need to have saved up for retirement. What matters are your expenses.
Many people think they will spend less in retirement than they did in their working years, but this usually isn’t the case, particularly in the first few years after you stop working full time. With all the extra free time on your hands, it can be easy to end up spending more money than you did while working full time.
Here are a few examples of expenses that increase for most people as they age and particularly after they hang it up at the office…
- Hobbies (You know? Necessities like golf, fishing, and shopping!)
- Dining out (You don’t have time to cook, now that you’re busy with retirement!)
- Health insurance premiums
- Co-pays and deductibles (You thought Medicare was “all inclusive” didn’t you?)
- Prescription drugs
- Gifts for your grandchildren
Keep these in mind as you develop your estimated retirement budget.
Now that you have a rough idea of how much money you’ll need in retirement, let’s see if you have enough to cover those expenses.
2. Do I have enough money to retire?
A quick way to estimate whether or not you’re on the right track is to add together what you would receive annually from Social Security, a pension (if you’re fortunate enough to have one), and any other “guaranteed” source(s) of income if you were to stop working today.
Then take approximately 3% of the balance of your retirement savings (i.e. 401k, IRA, etc.) and add it to the total of the “guaranteed” income (nothing is obviously guaranteed, but work with me here).
Here’s an example to illustrate this calculation…
Let’s say between your Social Security and a small pension you’ll rake in around $20,000/year. You also have around $1 million stashed away in a 401(k) which multiplied by 3% is $30,000.
Add the two together and that gives you a grand total of $50,000/year in retirement income.
How does this number compare to your estimated expenses? For a lot of people, it’s lower than what they expected, meaning they won’t have enough to cover their estimated expenses if they retired today.
If that’s the case for you, then you have a few options…
- Work longer, giving you time to increase your retirement savings through regular contributions and investment growth
- Increase your Social Security payments by waiting until your full retirement age or later to start your benefit (Most people should do this anyway!)
- Lower your expectations of your lifestyle in retirement (I know, not exactly what you wanted to hear)
- Work part-time to fill the gap between your retirement expenses and your retirement income
What about increasing the percentage you withdraw from your retirement savings to say, 4% or more?
Admittedly, 3% is more of a rule of thumb (remember what I said above about rules of thumb?) and in reality everyone’s situation will be different. Also, when discussing withdrawal strategies, the conversation gets really technical, really fast since a lot of this depends on the expected rate of return on your investments, but if you want to read the technical stuff to learn why 3% is a good starting point for this conversation, be my guest.
You can access a recent research paper about safe retirement withdrawal rates by clicking here. USA Today also had an article recently covering the research findings that puts a lot of the same info from the technical research into layman’s terms. The USA Today article can be found here.
3. What will I do after I retire?
As you can see here, a man or woman who turns 65 today can expect to live, on average, until age 84 (man) or 85 (woman). Some will live much longer and some, much shorter. But if you retire at 65, that’s at least 20 years (on average) that most of you will have to plan for after hanging it up at the office. Potentially much longer if you retire before that!
Obviously, the majority of us don’t know when our time here on Earth will be over, for our life is “like a vapor that appears for a little while and then vanishes away.” Do you have a plan in place so that you don’t waste away the rest of your precious moments here on Earth after punching the time clock for the last time?
We were created to work, to be productive, to invent, to design, to build, to produce, to teach, to learn, to grow, etc. I don’t even like the word retirement because it means to “cease from work.” As you know, if you’ve read this blog for any length of time, I prefer the word “rehirement.” Even so, there is definitely a time in most people’s life where they will likely transition to a different career or activity.
If you enjoy your job, for example, why stop? Maybe you’re just wanting to spend some more time with your children or grandchildren. Perhaps you can talk to your boss about the idea of working part-time as you transition out of the workplace.
Or maybe you don’t enjoy your job. If that’s the case, try researching other full-time or part-time opportunities, some of which are specifically geared towards people nearing or in retirement.
And if you’re a Christian nearing retirement, check out this short free eBook by author and former pastor, John Piper called Rethinking Retirement for some more great advice on how to make your Golden Years count for something that will make an impact on the world long after your time on Earth is up.
But that’s not all…
If I was a doctor, and someone came to me saying, “Dr. Gray, I’m 5 feet 9 inches tall and I weigh 180 pounds. Do I have cancer?” it would be ludicrous for me to think that by asking two or three questions I could determine whether or not they had cancer.
No person in their right mind would think that.
A few questions might be helpful, but a competent physician will want to know a plethora of other information about your health. They’ll want to know your blood pressure, cholesterol, medical history, white blood cell count, and much more. They’ll also want to run all sorts of tests before giving you any sort of advice on what to do next.
Such is the case with the classic “Can I retire?” question.
Hopefully though, by answering the three questions listed above, you’ll have a better idea of whether or not you can think about retiring any time soon.
Regardless of what your situation is though, I HIGHLY recommend speaking with a licensed, competent, fee-only financial advisor. They can help you sort through all of this stuff in a way that’s easy to understand and personalized to your situation.
You know what? I think I might even know someone you could call…