Deciding when to retire is one of the most important life decisions you'll ever make. Many people don't know the basic questions to ask in making this decision.
The "traditional" retirement age is 65. This has gone by the wayside to some extent in that the age to receive full Social Security benefits continues to increase. Some people want to retire early, say, at age 55. Others look at how much they'll get from Social Security—benefits begin at age 62, but the longer you delay, the more it pays out. Additionally, many retirement portfolios are worth less than they were a few years ago because of fluctuations in the stock market. Many people are wondering if they might have to put off retiring far longer than they had expected or if they will be able to retire at all.
Here are some questions to ask yourself as you try to make this all important decision.
How many years can you afford the lifestyle you want in retirement? The worst thing that can happen is that you run out of money in retirement. If you are uncomfortable with your ability to answer this question, consider hiring a qualified financial planner to help.
What is my lifestyle going to cost in retirement? Is your house paid off? Are you going to travel and entertain frequently? Do you want to own two homes, one in a warmer climate for the winter and a cooler one for the summer? What will the cost of living be in each of those places? What kind of uncovered medical expenses do you expect?
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These are all important questions to ask yourself. Start by putting together a household budget for your anticipated expenses. Note that you may spend more in the early years of retirement on activities such as travel and perhaps more on health related expenses as you age. Don't forget to factor in inflation as even a relatively low level of inflation can erode your purchasing power over time.
What sources of income will you have? Will it be only Social Security or will it include other regular payments, like from a pension, consulting or self-employment, rental income, royalties, and the like?
How much do you have accumulated, and what annual income can you generate from it? Sources of retirement savings often include IRAs, 401(k) plans, annuities, and taxable accounts.
Will your income cover your expenses? If so, you might be able to retire at the age you project. If the rate at which you withdraw money from your retirement portfolio is too high, however, you run the risk of depleting those resources before you die, which will likely result in making some very uncomfortable adjustments to your lifestyle.
If you determine that your income won't cover your expenses, there are five potential solutions:
• Delay retiring while you add to your personal savings, and increase the amount you can collect from Social Security.
• Plan to work at least part-time during retirement.
• Increase the amount you are saving each year towards retirement.
• Change the investment mix in your portfolio to potentially increase your rate of return. Please note this will likely increase your investment risk, so tread carefully here.
• Plan for a less-expensive retirement lifestyle.
A comprehensive financial plan runs through all of these calculations and aims at a realistic answer to the question of when you can realistically retire, based on all the details of your finances and the level of risk that's appropriate for you.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill. where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn. Roger also blogs at Chicago Financial Planner.