Can I Retire?
How to Know When Retirement Is an Option
Here's a dirty little secret: not everyone gets to retire.
OK, it's not really a secret. Most of us know someone who at age 70, 80 or even 90 still works at least part of the time. Some do it because they love it and can't imagine doing anything else, others because they must. And this is a generation lucky enough to have healthy Social Security payments and pensions. As a member of Generation X, the message I've received all of my life is that Social Security might not be there for me, and I have to build my own pension.
Most of the people I know are resigned to the idea that they'll never be able to retire.
But retirement, even a comfortable retirement, is not as elusive as you might think. Especially for those who have saved and invested regularly throughout the working years. Once your portfolio can generate enough income to cover expenses, you can write your own ticket.
Can you retire? Run the numbers to see what's possible. The following steps will help you determine your retirement readiness today and help you prepare for retirement in the future.
1. Get an income goal. To get an estimate of how much money you will need to retire, the first thing to do is figure out what you need to live on. Financial professionals generally recommend budgeting for about 85 percent of your current expenses, under the assumption that you will spend less if you're not commuting or buying things like work clothes and office lunches.
Your own personal expenses may differ, so create your own budget that lists essentials and everything else. This is a good exercise to help you start trimming anything nonessential you are willing to give up, and even consider ways to lower essential expenses like housing.
2. Develop a timeline. Once you have a rough estimate of what you need to live on in retirement, the next step is to calculate how long your existing savings will last.
(We'll assume that your investments will help your savings keep pace with inflation.) Because it's impossible to know how many years you will need the savings to last, it makes sense to err on the side of longevity. Keep in mind that the average American now lives in retirement for more than 25 years, according to Fidelity Investments.
3. Consider guaranteed income. With all of the uncertainty that comes with planning for retirement, guaranteed income streams can provide a little bit of surety and stability. Guaranteed means income you know you can count on, from sources such as defined benefit pensions, Social Security and annuity payments. Ideally, your guaranteed income streams will cover your essential expenses. If this is not the case, you might consider a lifetime income fixed or variable annuity. Just keep in mind that not all annuity products are created equally, so work with a financial advisor or brokerage you can trust, be aware of what the annuity costs and ask a lot of questions if there is anything you don't understand.
4. Set a savings withdrawal rate. Once you have figured out the factors above, you should have a sense of how much you can safely withdraw each year from your savings and investment accounts.
Experts generally recommend a target withdrawal rate of 4 percent annually (or anywhere from 3 percent to 6 percent depending on other income sources and economic outlook). There are plenty of online calculators (like this one from Vanguard) that can help you figure out what a 4 percent rate would look like from your savings and that rate will impact your portfolio over time. This is an eye-opener, and will help you get real about your retirement income needs.
These four steps will help you determine whether you can retire today. If the answer is no, you now have a better picture of what to work on. Do you need to increase your savings rate? Find a guaranteed income source? Work longer or find a part-time job or business to supplement income? Downsize your home or spending habits? Armed with information and willing to make some small tweaks, you could be retirement ready in no time.
The content on this site is provided for information and discussion purposes only. It is not intended to be professional financial advice and should not be the sole basis for your investment or tax planning decisions. Under no circumstances does this information represent a recommendation to buy or sell securities.