Find Out if You Have Enough Money for Retirement
By the time most people reach their mid-30s, the question most on their minds is, am I saving enough for retirement?
That’s because experts say, at that age, the focus then is on the asset accumulation phase of people’s lives.
However, by your early to mid-50s, you’ll probably be asking yourself this more frequently: Do I have enough to retire? You are now about to enter the asset draw-down phase of your life, and your focus is on whether you’ve managed to accumulate enough wealth for a comfortable retirement.
Hypothetically Speaking
So, if, for example, you are a few years from your retirement date and are hoping to accumulate a nest egg of $1 million by the time you reach your planned retirement date, would you still be asking yourself the question, will I have enough to retire by the time I hit that date?
The most appropriate answer is, it depends!
The funding of your retirement depends on three essential facets of retirement planning:
- The time horizon of your retirement
- The retirement lifestyle you plan to live
- How you will fund that lifestyle
All other variables – like the rate of return your savings are/will be yielding, the rate of inflation, and how much you are saving regularly for your retirement – feed into those three key facets of the post-retirement phase of your life.
For instance, if you intend to have an extremely modest retirement lifestyle, the hypothetical million-dollar nest egg cited above could give you a response of “Yes!” to the question, “Do I have enough to retire?” However, given typical current rates of returns, a million-dollar nest egg might not support you over a 30 or 40-year retirement period, especially if your retirement lifestyle is considerably lavish.
To know definitively whether you have enough money for retirement requires an in-depth review of what your retirement lifestyle will cost (outflows) you annually and what your income (inflows) will be in retirement. Using these two pieces of information will then help you better determine the answer to the question, do I have enough money to retire?
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Doing the Math
While the process described below will give you a high-level picture of where you stand in terms of having enough money to retire on, you will still need to consult a qualified financial planner and ask him/her the question, do I have enough to retire? He/she can help you deal with the more complex math – including inflation-adjusted costs, real rates of returns, etc. – that are usually associated with retirement planning.
The following steps will, however, help you prepare for that eventual discussion.
Retirement Outflows
The first step in answering the question, do I have enough to retire early? is to assess how much of your nest egg will flow out of your savings annually. Most retirement planning experts believe that it is reasonable to expect retirees to spend anywhere between 20% and 25% less during retirement compared to their pre-retirement period. And here’s why:
- Typically, people tend to pay off their mortgages and other major debts prior to retirement. That eliminates a major source of outflow in retirement.
- Retirees tend to have fewer work-related travel, professional development, and socializing expenditure, eliminating yet more outflows.
- And when considering the question, will I have enough to retire? keep in mind that expenses – like clothing, self-grooming, work-related driving, and other work-related expenditures – will be entirely eliminated.
- Many retirees will likely downsize their accommodations, further reducing post-retirement outflows.
If you want to know whether you have sufficient funds to enable you to retire, then the first step is to define the lifestyle you wish to live in retirement and determine the cash outflows required to sustain that lifestyle. Remember to plan for taxes as part of this exercise.
Retirement Inflows
While you are working, most of your inflows for routine expenses likely come from your salary. However, if you are asking yourself the question, do I have enough money to retire? it is probably because you have either recently retired or may be close to retiring. A regular salary would, therefore, not be one of your streams for cash inflows.
Retirees, however, do have other sources of inflows, including:
- Interest, dividends, and other returns from money saved (and invested) in retirement accounts (401Ks) and IRAs.
- Where eligible, you may also receive inflows from Social Security and other government programs. You can estimate your retirement Social Security benefits using this tool from the U.S. Social Security Administration.
- If you are one of the fortunate few, you may be part of a company pension plan, from which you will likely receive additional inflows to fund your retirement expenditure. To answer the question, do I have enough money to retire? contact your company’s human resources department and get an estimate of what your monthly pension entitlements will be worth.
Add up these three key pieces of information to determine your total retirement inflows. The figure you come up with will help you assess whether you have enough money saved for your retirement.
Retirement Withdrawals
Now that you know how much you wish to spend in retirement (outflows) and where your retirement income (inflows) will come from, you can do some more math to address your original question: Do I have enough to retire?
Retirement planners will tell you that a typical retiree can safely withdraw anywhere between 4% and 5% of their nest egg annually, without the fear of outliving their money. What that means is that, if you have managed to accumulate a $400,000 nest egg by the time you retire, you may safely withdraw between $16,000 and $20,000 each year to fund your retirement lifestyle.
So, if you want an honest answer to your question, will I have enough to retire? ask yourself whether your retirement lifestyle requires more than the specified rate of withdrawal discussed above. If it takes more than that amount to fund your retirement, then, clearly, you do not have enough money for retirement – yet!
Image source: Big Stock
Retirement Planning Caveats
Now that you have established whether you have enough to retire, the next question is, should you retire as planned? The answer to that question is filled with many caveats, some of which were already introduced earlier on in this article:
- Rates of return: While the recommended 4%-5% withdrawal rate holds true for the “typical” retiree, how much you can actually withdraw annually from your nest egg will depend on how well your nest egg grows in retirement. Pulling out 4% to 5%, from savings that is growing only at 0.5% or 1% annually may not leave you much to survive on for a prolonged retirement.
- Inflation: To accurately answer the question “Do I have enough to retire?” you should first be able to answer the question: How much of my nest egg will I lose annually to inflation? If you plan on spending 4% to 5% of your nest egg annually, and inflation “eats up” 1.5% to 2% of those savings each year, then you really are exceeding the annual withdrawal threshold recommended by the experts.
- Unforeseen expenses: As we age, we need to plan for unforeseen outflows from our retirement nest egg. Before you answer the question, will I have enough to retire? consider additional questions: What if the roof needs changing two years into my retirement? Suppose I or my spouse face a major health crisis in retirement?
Before taking a decision on whether you should retire or delay retirement, run the numbers once again using various combinations of rates of returns, inflation, and rates of withdrawal. Only once you are certain that you will have enough money for a comfortable retirement should you take the plunge.
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Retirement Choices
When all’s said and done, you may not like the answer you get to the question, do I have enough to retire? Should that be the case, there may be some tough choices that you may need to make:
- Lifestyle choices: If your money isn’t enough to support a specific retirement lifestyle, then you may need to cut back on certain expenditures to fund your retirement. Some low-hanging fruit on the expenditure tree to set your sights on include utilities – like cell phone data plans, Internet and cable, dining and entertainment, insurance, gym memberships, and magazine subscriptions.
- Working longer: If the answer to the question, “Will I have enough to retire?” is “No!” then perhaps you need to consider working for several years beyond your original retirement date.
- Saving more: If you are still employed, part of your retirement plan might be to save more of your income. An accelerated saving plan could boost your next egg sufficiently to give you enough to retire on.
- Delayed gratification: Many retirees strategically delay taking government benefits until they turn 70 or older. The resulting increased Social Security payout might just be enough to help you live a comfortable retirement.
The best advice anyone can give someone trying to answer the question, do I have enough to retire? is to follow the steps outlined above and determine whether your retirement inflows can realistically support your retirement outflows. If not, then you probably need to make some tough decisions to bridge the difference.
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