How do I know when I can retire?
One of the most common questions we get from prospective clients is "How do I know when I've saved enough for retirement?"
I'll be honest, there's no hard and fast rule for determining how much you need or exactly when you can retire. Everyone's situation is unique.
However, there are some things you need to take into consideration to determine if you're on the right track or if you need to make some adjustments to your retirement plan.
Determine where you retirement income will come from
Retirement income can come from multiple sources. Most people will get at least part of their income from Social Security, so it's important to understand how much you'll receive depending on what age you retire.
The minimum retirement age to collect Social Security benefits is 62, but if you start collecting benefits that early you'll permanently reduce your monthly benefit by 25-30%.
Full retirement age is 66 or 67. The Social Security Administration determines your full retirement age by date of birth, so make sure you find out exactly when you'll reach full retirement age.
Delaying Social Security benefits will mean they continue to increase until you reach 70 years old. These benefits can increase by as much as 5-8% per year that you delay. Keep in mind there is a break even calculation between taking Social Security at 62 vs 70. We always recommend you take that into account as taking it early can act as a great buffer to your portfolio.
The Social Security Administration also provides personalized benefit estimates, to learn more about how much you can expect to receive you can. set up a My Social Security account.
It used to be common for employers to offer a pension as part of their retirement benefits. Many companies have now phased out pensions in favor of other retirement benefits, such as higher 401(k) matches.
Some private sector jobs still have pensions, but they're more common if you work in government or are a union member. If you have a pension you'll want to understand how much your monthly payout will be and what age it starts. You'll also want to know if you'll receive a reduced benefit if you retire early.
Retirement accounts and savings
Whether it's a 401(k), IRA, Roth IRA, TSP, or other retirement account, these accounts are also important parts of your retirement income.
Don't forget that if the money went into the account pre-tax you'll need to pay taxes on it when it is withdrawn.
Part time or seasonal employment
While many people don't want to work during retirement, there may be a part time or seasonal job that you've always thought you'd enjoy and want to try. Income from a job like that can help reduce the amount you need to take from other places or allow you to spend money on things you otherwise may not.
Figure out your approximate expenses
Expenses fall into three buckets: must-haves, wants, and contingencies/emergencies.
These are the things that you can't go without. Food, shelter, a certain amount of clothing, transportation, utilities, health insurance and healthcare, other insurance, necessary home maintenance, taxes, and any other mandatory expenses all fall into this category
For a baseline, determine what you absolutely have to spend on these categories now. Which of these expenses will you still have when you reach retirement age?
If you have a mortgage and it will be paid off prior to retirement you don't need to include it. However, if you have a paid off car but will need to replace it using an auto loan you'll need to include those payments in your expenses.
Non-essential clothing and eating out are not must-haves, you'll include them in the wants category.
Also keep in mind that your healthcare expenses will probably increase with age. The average retiree spends 10-15% of their income on healthcare expenses.
This category is made up of those expenses that are nice, but can be reduced, eliminated, or postponed if needed. Things like eating out, travel, entertainment, clothes beyond the essential, furnishings and decor, and housekeeping and lawn services.
These are the unexpected things that can and do arise, often with little or no notice. After retirement it can be harder to cover those expenses, which is why it can be beneficial for retirees to have larger emergency or contingency funds than they had when they were working.
You'll also need to consider long term care or nursing home/skilled nursing facilities. Medicare doesn't cover those expenses, so you may want to consider long-term care insurance or earmarking parts of your savings specifically for those expenses.
You'll also need to consider inflation in your expenses. Even modest inflation will cause prices to be higher when you retire than they are today, and healthcare expenses can rise faster than the average rate of inflation.
Social Security offers cost-of-living adjustments, but if you have a pension you should find out if there's any inflation or cost-of-living adjustment included in your plan.
Determine your retirement age
Now that you have an idea of your expenses and sources of income you can decide what your approximate retirement age should be.
Keep in mind that retirement age will affect your overall social security retirement benefit. This is where your My Social Security account can come in handy. You can see exactly what you should expect to receive each month based on retirement age.
Seeing the numbers in black and white can make it easier to decide if it's worth increasing your retirement age slightly to get the potential benefit increase.
It can also help you see if you'll receive enough in benefits to maintain your desired lifestyle if you decide to take early retirement.
How much do I need to retire?
There's no set number for how much a person needs in order to retire. That's because the amount is determined by your lifestyle, expected retirement age, and sources of income.
You'll want to base the amount you think you'll need on what you expect to spend. That's why understanding your expenses is the first step to knowing when you can retire.
However, a generally accepted rule of thumb is to save enough that 4% of your savings will cover your first year of expenses.
Once you've determined your approximate expenses for a year, subtract the amount you expect to receive from Social Security based on your estimated retirement age. Multiply the resulting number by 25 and that will give you a ballpark number for what you should save.
Talk to a financial planner
You should always go over your retirement plan with a trusted financial planner. They can help you take into consideration things you may not have thought of, and can provide the peace of mind that you're on the right track.