Many people want to know when they can retire, but it may be time to re-answer the question.
Asking yourself what kind of retirement you can afford and what changes you need to make to reach your savings goals can allow you to retire on your own without getting single-digit deductions. Someone who wants to travel and splurge on new hobbies will have different savings needs than someone who is open to downsizing.
Why should I ‘retire?’ wrong question
The “can I retire?” The question often revolves around the savings balance or the magic number, but there are often better ways to consider when and how to go. You need to first look at your expenses. Health care, housing, debt and taxes all affect how much money you need to have each month to retire. Social Security can cover some of these costs, and a retirement savings portfolio can fill any gaps.
The amount you have to withdraw each year depends on the size of that gap. If you get $2,000 a month from Social Security and average $5,000 a month in expenses, you need to cover the $3,000 gap every month. That makes it easy to map out when you can retire based on that lifestyle. However, if you want a high quality of life that includes $7,000 in monthly expenses, you will need a large nest egg.
This analysis makes it easy to determine how much you need to retire. The number will vary from person to person, and the right number will also depend on factors such as whether you want to support family members or live in a more expensive area.
Another question to ask
Changing this analysis from a rough number to what retirement can afford leads to more detailed planning. You get to explore what kind of life you want and you can act accordingly. You can choose to cancel the subscription and downsize to retire early or because you no longer need that expense in your life.
Some people may find that they need a gig or part-time job in addition to Social Security. Those additional sources of income can come with flexible hours and make it easier to maintain a high-quality lifestyle in retirement.
This preparation exercise will also help you determine the best time to withdraw Social Security. Applying for full retirement age protects higher benefits, and you won’t have to worry about income-based withholding. But claiming benefits immediately (you can do so as early as age 62) means you won’t have to wait for that extra source of income. Many factors go into determining the best time to claim Social Security, but knowing the math for your ideal retirement lifestyle can help.
Pressure-test the system before making the jump
It’s important to take a deep dive into your finances and what it takes to maintain your ideal retirement lifestyle before you retire. People looking to retire should consider several scenarios, such as what will happen to their plan if the market goes into a correction before retirement. Inflation, rising health care costs and living into your 90s are some of the events you should consider.
Can your retirement plan withstand those conditions, and how can you adjust? The 4% withdrawal rule has long been the rule in the retirement industry, but some may need to withdraw 5% and others may reduce that figure to 3%.
Review your retirement plan and finances each year to make sure you’re on track. Life events – such as illness or supporting an older child – can change and may require adjustments to your plan. Planning for retirement allows you to clearly understand the trade-offs so you can feel confident when it’s time to leave your job.
