How to Know If You Have Enough Money to Retire

Retirement is something many people dream of, but deciding when you’re financially ready can be tricky. It’s not just about the total sum in your savings account; it’s about making sure you can maintain your lifestyle, pay for healthcare, and weather any unexpected expenses without working. So, how can you know if you have enough money to retire?

This blog post will break down the steps and considerations to help you answer that question with confidence.

1. Assess Your Retirement Goals

Before diving into the numbers, it’s important to have a clear understanding of what retirement looks like for you. Not everyone’s vision of retirement is the same. Some people want to travel the world, while others plan to downsize and live a more frugal lifestyle. The first thing you need to do is answer the following questions:

• What do I want my lifestyle to look like in retirement? Think about how much you plan to spend on travel, hobbies, dining out, or any big-ticket items.
• When do I want to retire? Do you want to retire early or at the traditional retirement age of 65? The earlier you retire, the longer your money will need to last.
• How long do I expect to live? While it’s impossible to predict, looking at your family’s longevity can give you a rough idea of your retirement horizon.

Once you’ve clarified these questions, you can begin to calculate how much money you’ll need to fund the lifestyle you want. Many financial planners recommend a “safe” withdrawal rate of 4% per year from your savings, but this can vary based on your retirement goals.

2. Estimate Your Retirement Expenses

Start by estimating your monthly and annual expenses in retirement. While you may no longer have mortgage payments, there are still ongoing costs that you’ll need to cover expenses might include:

• Housing: Even if you don’t have a mortgage, you’ll still need to factor in property taxes, insurance, maintenance, and utilities.
• Healthcare: Healthcare is one of, if not the most significant expenses for retirees, and it can often exceed what you expect. Factor in private insurance, out-of-pocket expenses, and long-term care costs if necessary.
• Daily Living: These are your everyday expenses like groceries, transportation, and utilities. While they may be lower than what you’re currently spending, they still need to be factored in.
• Lifestyle Costs: This includes travel, entertainment, dining, or any special activities you plan to pursue in retirement. You should keep in mind that “free” time really isn’t free at all.  Your $15.00 lunch at your desk can quickly turn into a $45.00 lunch including a glass of wine when with friends!

Once you’ve listed all your expected expenses, add them up to get an estimate of your annual retirement budget. If you plan to retire at 65 and expect to live for 30 years, you’ll need to multiply your annual expenses by 30 years to get a baseline of how much you’ll need.

3. Evaluate Your Retirement Savings

Take a hard look at the savings and investments you’ve accumulated for retirement. This includes:

• 401(k), IRAs, and other retirement accounts: These accounts often come with tax advantages and are designed for long-term savings. Look at your current balances and consider how much growth you can expect based on your investment strategy.
• Taxable investment accounts: If you’ve invested in stocks, bonds, or mutual funds outside of retirement accounts, they will also be part of your retirement income.
• Social Security: Estimate your Social Security benefits by creating an account on the Social Security Administration website or reviewing your benefit statements. While Social Security won’t replace all of your income, it will be a helpful supplement.
• Pensions or other sources of income: If you have a pension or other guaranteed sources of income, such as rental income or annuities, these should be factored into your overall retirement plan.

Once you have a clear understanding of your total retirement savings, compare that to the amount you expect to need each year. A good rule of thumb is to aim for a retirement savings that will allow you to withdraw no more than 4% of your balance each year. For example, if you need $40,000 per year in retirement, you should aim to have at least $1 million saved.

4. Run the Numbers with a Retirement Calculator

Retirement calculators are an excellent tool to help you gauge whether you’ve saved enough for retirement. They can help you determine whether your savings, investments, and expected income sources will meet your retirement goals. The calculator will typically ask for:

• Your current savings
• The rate of return you expect on your investments
• The amount of income you want in retirement
• The age at which you plan to retire

These calculators can help you assess the feasibility of your retirement plans and give you a clearer picture of whether you’re on track or if adjustments are needed. However, please be careful to recognize that the results of a retirement calculator uses historical assumptions and does not reveal how income is created from your portfolio. For example, the historical yields for bonds in retirement have ranged between 4% and 6%, but just three short years ago, bond yields as measured by the 10-year treasury bond were below 2%.  This type of low interest rate environment would drastically underestimate the size of a retirees required nest egg; a very dangerous mistake retirement age.

5. Account for Inflation and Market Risk

One of the biggest threats to your retirement savings is inflation. Over time, the cost of goods and services increases, meaning your $50,000 a year today may not be enough 20 or 30 years from now. To combat inflation, consider factoring in a conservative estimate of inflation (usually around 2% to 3%) when calculating your future retirement needs.

Another risk to keep in mind is market volatility. Stock markets can fluctuate, and the value of your investments can rise or fall based on the economy, interest rates, and other factors. To manage this risk, it’s important to have a diversified portfolio and adjust your asset allocation as you approach retirement. You might want to gradually reduce your exposure to stocks and increase your holdings in more stable assets like bonds.

I believe inflation is often overlooked; however, it is not as crucial as considering stock market volatility. If a retiree is faced with reducing their monthly nights out to the movies, or reducing the number of trips they plan for the year, the adjustment is easily made, However, let their monthly income be cut by even $100s because of negative events in the financial markets, and not only are they angered but panic sets in.

6. Consider Your Withdrawal Strategy

The way you withdraw funds from your retirement accounts can impact how long your money lasts. A common strategy is the 4% rule, where you withdraw 4% of your retirement savings annually. However, you may want to consider a more flexible withdrawal strategy that adapts to market conditions and changes in your personal expenses. Some people withdraw more when the market is performing well and less when it isn’t. Personally, I disagree whole heartedly with this variable approach for the reasons mentioned above, but I see it mentioned in financial planning communities often. No one wants a pay cut, especially not in retirement.

Additionally, remember that taking early withdrawals from retirement accounts (before age 59 ½) can incur penalties and taxes, so plan accordingly.

7. Plan for Unexpected Expenses

Even the best-laid plans can be disrupted by unexpected events. Whether it’s a major health issue, a home repair, or a sudden family obligation, it’s crucial to have an emergency fund in retirement. Set aside enough cash in a safe, easily accessible account to cover unexpected expenses without having to dip into your long-term retirement savings. Cash does not necessarily mean your bank savings account. The term cash is meant to mean safe and accessible funds.  Bank savings accounts are stuck in the low yield environment of 3 years ago, while safe investments like US Treasury bills are paying over 4% these days.

8. Seek Professional Advice

Financial planning can be complex, and making mistakes could cost you a lot in the long run. If you’re unsure whether you have enough money to retire, consider consulting a financial advisor. They can help you assess your situation, adjust your plan if necessary, and ensure you’re on track to achieve your retirement goals.

Conclusion

Knowing whether you have enough money to retire comes down to assessing your retirement goals, calculating your expected expenses, evaluating your savings, and planning for potential risks. By carefully considering all these factors and using tools like retirement calculators, you can get a clearer picture of your financial readiness. However, at some point in time, the planning has to end and the execution needs to begin to include. Calculators and forecasts using historical data for assumptions, need to be compared to what is available in the current market conditions, especially when considering bonds, annuities and other fixed income as a part of your income plan.

If you find that you’re not quite where you want to be, you can adjust your savings strategy, investment plan, or even retirement timeline. Ultimately, the key is to ensure that your retirement savings will sustain your desired lifestyle for the long haul, while also leaving room for flexibility and unexpected expenses.