If you are approaching retirement, you’ve probably played with a few online retirement calculators, interrogated your financial planner, and even crafted some retirement spreadsheets of your own. Even though you’ve done all your homework, you might still question whether you really do have enough money to retire. Here is how to determine if your nest egg is likely to last the rest of your life.
Start with the safest answer. For a traditional 30-year retirement, the safest approach is to follow the 4 percent rule. Figure out what your annual retirement spending will be and multiply that by 25. Let’s say you expect a comfortable retirement to run you about $50,000 a year. That means you’ll need a nest egg of $1.25 million ($50,000 x 25). Each year, you’ll withdraw your inflation-adjusted budget from your retirement accounts. For example, if inflation is 3 percent the first year of retirement you’ll withdraw $51,500 in the second year. Historically, the 4 percent rule would have provided at least 30 years of retirement security, as long as you had invested no less than 50 percent of your retirement assets in stocks.
Refine your number. Don’t despair if the math comes up short. This was just the first step. Consider any income you will earn from other sources, such as pensions and Social Security. Review your Social Security benefits statement. If it shows that you will earn $15,000 per year, instead of $50,000, you’ll now only need to withdraw $35,000 annually to cover your living expenses. This brings your target savings down from $1.25 million to $875,000.
Consider some adjustments. If you still don’t have the results you’re after, you may not have to resign yourself to working longer. If you are really eager to retire, consider getting creative with your retirement budget. Maybe a city with a lower cost of living appeals to you. Perhaps you’d rather stay put, but not necessarily in the four-bedroom spread where you raised your kids. Consider ditching yard work for a condo within walking distance of downtown or snag the chance to trade the hassles of home ownership for life as a renter. You’ll have to increase your budget for rent, but you’ll save on property taxes, insurance, and home maintenance costs. And all that equity from the sale of your house will top off your retirement reserves.
[See How to Retire in a Recession.]
Be a little flexible. If staying in your home is important to you, a reverse mortgage might serve to fill the potholes down the road. Working part-time or starting a little side-business might also do the trick. If your retirement budget includes a mortgage that will be paid off in a few years, you’ve just found a little more spare change in those cushions. There may be years that you find you don’t need the full 4 percent withdrawal, so don’t take it that year. If you can take a flexible approach, perhaps forgoing a trip every few years, you might be able to get away with a little less at the start.
Work backward. It’s hard to argue with the idea that more money is always better. But if you’ve tired of the save more and work longer chant, maybe it’s time to start asking how little you’ll need instead of how much. Contemplate a retirement budget that works with your existing resources: Divide your nest egg by 25, add in your other income sources, and see how far you are from your ideal budget. What tweaks would you be willing to make to get the numbers to work? You might find it’s worth a few concessions to swap your full-time job for a life of full-time play.
Sydney Lagier is a former certified public accountant. Since retiring in 2008 at the age of 44, she has been writing about the transition from productive member of society to gal of leisure at her blog, Retirement: A Full-Time Job.