Do I Have Enough to Retire? 5 Things to Consider.
There are a lot of factors that go into a decision to retire. We would all like to get to retirement with seven or even eight-figure retirement accounts however the reality for most Americans is that retirement will rest largely on a limited income with some sacrifices. This isn’t to say that retirement limitations are inevitable, just the reality for many who did not initiate retirement savings early enough. Retiring with a seven-figure retirement account is possible through wise and diligent financial management throughout a person’s working life. (See this article on saving money from your salary for more information.) Not on track for a 7 figure retirement? If not, we have 5 things to consider.
Deciding if you have enough to retire requires a solid understanding of 5 things:
- Your current spending and income levels. Also known as your budget.
- What lifestyle do you want in retirement?
- What sources of income do you have and how much monthly income will it add up to every month?
- What do you expect your monthly expenses to be?
- What large expenditures do you expect to be needed from your nest egg?
From these five things, we can forecast a budget for the type of retirement available to you as the numbers currently exist. Let’s start with the first question.
1. Do you know your current income and spending levels?
This is self-explanatory. If you don’t know your current income and spending levels (to the dollar) you cannot hope to know if you have enough to retire. You simply don’t have a reference point from which to judge. Are you using a monthly zero-based budget? If not, get started on one today. Knowing how much you currently earn and how much you currently spend every month is an indispensable part of answering this question. Once you have a good grasp on your current finances you’ll be able to better evaluate what your desired retirement lifestyle will cost and how much income will be required to support it.
Download this free zero-based budget pdf to get started today.
2. What type of lifestyle will you want in retirement
With all of this new time on your hands, you’ll need to know how you would like to spend it. Are you content with living the remainder of your years riding a bike to the local coffee shop twice a week or does your idea of retirement look more like frequent traveling and with summers at a lake house? Knowing if you have enough to retire requires that you decide on your desired lifestyle compared to your current standard of living.
- Do you want to increase your current lifestyle via travel and shopping?
- Are you okay with maintaining your current lifestyle?
- Are you willing to downsize your pre-retirement lifestyle to be able to retire?
Once you know the answer to this question you’ll be able to estimate the monthly expenditures required to fund this lifestyle and compare it to your anticipated income.
Take a look at your current monthly expenditures according to your budget and real-life spending. How much monthly income will be needed relative to your desired lifestyle once you retire?
3. What sources of income will you have during retirement?
Ideally, at this time you’ll know your current budget and expenditures. You’ll also know what type of lifestyle you’d like to have during retirement and what type of income will be needed to support it. Now, let’s consider how much and what sources of income you’ll have during retirement.
- Social Security – If you have not already done so, learn more about your Social Security benefit upon retirement here. Add your Social Security benefit plus your spouse’s benefit together. Important Note: Don’t forget to factor in what your ss would look like if a spouse passes away. Knowing if you have enough to retire means planning for worst-case scenarios. If/ when a spouse passes your income will be reduced to the larger of the 2 social security benefits. Learn more about how your social security is calculated upon the death of a spouse here: Social Security spousal survivor benefits.
- 401Ks and ROTH IRAs – Most experts agree that you should draw no more than 4% of your retirement nest egg annually. This means that if you have a nest egg of 250,000 you should only draw $10,000 per year to protect your principal balance. ($250,000 x .04 = $10,000 annually or $833 per month) See the note below about taxes. Don’t forget to prepare for taxes!
- Pensions – There are not too many pensions still in existence today but most teachers, along with some government employees, will fall into this category.
- Part-time Work – Most people can’t wait to hang up the daily commute and sit back in their easy chair. The reality is that for some of us, the idea of “doing nothing” will soon have us fidgeting in that chair looking for something to keep busy. The reality is that it costs money to stay busy even at home. Household projects, getting around town, and even volunteering can cost a few dollars. So if you can’t sit still you’ll need enough money to fund the activity or continue working. In my case the answer is easy. I can’t sit still for too long so I plan to work part-time in retirement; it will keep me busy, provide some income, and keep me active so I avoid too much atrophy from being more sedentary than usual. It will also help me retain a sense of purpose.
A note about taxes: It is important when considering your monthly income in retirement to factor taxes into the equation. Some states tax retirement income and others don’t tax it at all. Still others tax retirement income but only after a certain income level. You can find a good article about your state and how it treats forms of retirement income here.
4. What do you expect your monthly expenses to be?
Many experts agree that retirement expenses are usually about 70% to 80% of your pre-retirement budget. This implies that you are trying to maintain your current standard of living. But what if you wanted to increase your standard of living or decrease it? If you would like to increase your standard of living add 10% to 20% to that number. To decrease your standard of living you might expect to spend around 60% of your current levels. Don’t forget to factor in health care costs which can be estimated to be about 15% of your overall expenses in retirement. Overall, spending patterns change for most older adults according to the Bureau of Labor and Statistics.
- If you know your annual income while you’re still working, expect to spend between 55% and 80% of that every year throughout retirement, depending on your income, retirement lifestyle, and health care costs.
- If you plan an active lifestyle in retirement, expect to ratchet up your annual retirement budget by 10+ percentage points compared with a less active lifestyle.
- Expect 15% of your living expenses to be related to health care expenses after you retire, year in and year out.
5. What large expenditures do you foresee needing to use your nest egg for?
We hope to be healthy enough to enjoy a long and happy retirement which means your roof and car and other large ticket items won’t last forever. So when deciding if you have enough to retire don’t forget to factor in these needs. They will have to be paid for somehow and in most cases retirees will need to pull from savings to pay the bill. If your savings, such as your 401K or Roth IRA need to be tapped, the interest-earning potential of that nest egg will be degraded. Whatever the case, be sure to factor in larger ticket items into your retirement budget.
Final Thoughts: Do You Have Enough to Retire?
Retiring takes planning but the math is surprisingly simple. As with anything personal finance, it all begins and is maintained with a budget and by knowing your numbers. Make a full list of your income and anticipated expenses for retirement. Be sure to account for any large expenditures, such as a car, that you’ll for which you’ll need to dip into your nest egg. Don’t forget to factor in how your state treats taxes in retirement.
Gather all of your anticipated income during retirement and compare it to your anticipated expenses. If you find yourself lost on your expenses, start a budget today. Download our free zero-based budget pdf here. It will bring clarity and help you better evaluate your current spending and income. Knowing your numbers now will give you the reference point from which to judge if you have enough to retire.
Knowing if you have enough to retire rests on your knowledge of your current numbers and budget. The better you know your numbers now, the better you’ll be able to project. Start a budget today and learn how to win with money.
