As you get older, you inevitably start to wonder if you’ve saved enough money to retire. Even if you love your job and plan to work forever, you can’t help but worry about whether you’ve put enough money away in the event you can no longer work because of circumstances like poor health. But how do you know if you’ve saved enough and can afford to retire? Here are some factors to consider:
What standard of living do you want to maintain? If you are willing to lower your standard of living, you can get by on less money than if you maintain your current standard of living. On the other hand, if you want to travel or enjoy activities that require more funds than you are used to spending, you’ll need to plan for increased income in retirement.
It can be helpful to draft a reasonable budget of expenses with your desired standard of living in mind, so that you can see how much income you will need each month in retirement. Be sure to research health insurance options if you know that you will have to pay for health insurance, since health care costs can be substantial when you’re retired. You’ll also need to take inflation into account – most experts recommend using a rate in the 3% to 5% range when projecting your long term retirement needs.
What sources of income will you have? Will you receive Social Security benefits, and if so, how much? If you’ve contributed to Social Security, you should receive an annual statement sometime around your birthday, which lists the monthly benefits you can expect to receive. You can also use the Social Security Administration’s online Retirement Estimator to project your benefits.
If you’re one of the lucky employees who still gets a pension, don’t forget to include it in your calculations. Even if your current employer does not offer a pension, make sure you didn’t leave money in a pension (or other retirement account) at any previous jobs.
You will also have to figure out how much money you can afford to withdraw from savings each month. Note that general life expectancy is until your mid-eighties, which means approximately 20 years of retirement if you retire in your mid-sixties. Thus, you need to plan for your savings to last at least 20 years. In general, experts advise being conservative in early retirement, and withdrawing no more than 3% to 5% of your savings each year. Keep in mind that you might live beyond life expectancy projections, and therefore you may need your money to last longer.
If your projected income meets or exceeds your projected budget, you can consider retiring tomorrow! But if your projected budget exceeds your projected income, you’ll need to make adjustments. Maybe you can work an extra year to pay off debt, which would free up cash once the repayments are no longer part of your monthly budget. Or if you have a few years or more until retirement, now is the time to increase your retirement fund with additional contributions while you are still working.