When Can I Retire?
The number one question working individuals have when they first sit down in my office is, “When can I retire?” My response is always, “When would you like to retire?” I have heard everything from, “yesterday, tomorrow, 5 years ago.” The most common answer I hear, though, is, “As soon as possible.”
I have always been baffled that, in our country, we need to go to school to get a job or a license to drive a car, even to own a dog, but we don’t seem concerned with educating people about retirement. This is one of the biggest decisions of a person’s life, and most people have no idea whether they are prepared or not.
Many factors come into play when planning a successful retirement. The more information your advisor can gather from you, the better the overall plan. I have met too many people who don’t have any plan at all. It is hard to believe that the average person will spend more time planning their summer vacation each year than they do on retirement.
If you are asking, “When can I retire?” it’s important to consider the answers to these six questions:
- Do you have a pension?
- How much debt are you carrying? (For example: House, car or credit card payments.)
- How much Social Security income will you receive?
- How much have you saved?
- Will you need to cover your own health care?
- Most importantly – Do you have a budget?
Let’s start with the budget. If you don’t know how much you will need to live each month, how will you know if it is possible to retire? Every pre-retiree or retiree should fill out a monthly budget sheet covering all fixed expenses, such as mortgage payments, car payments, real estate taxes, and health insurance. The budget sheet should also ask about all flexible expenses, such as meals and entertainment. Be honest. For example, people tend to undershoot how much they spend a month on eating out. It is important to be as accurate as possible when filling out this sheet, so your retirement plan fits your lifestyle, not the other way around.
Part of the budget factors in debt, like your mortgage or car payments. It makes sense to lower your debt load as much as possible before you enter retirement. After mortgage payments, the biggest monthly expense retirees are faced with is health care. You would not believe the amount of people who say they only work because of the benefits. If your former employer won’t continue to cover you, look for the best health insurance your budget will allow.
Once the budget is complete, it’s important to figure out where your income will come from. As unbelievable as it sounds, pensions are slowly becoming extinct. Many companies that offered pensions in the past have frozen them and now only offer new employees the option to fund their retirement with a 401k. This has left a large number of people dependent solely on their Social Security income. Most importantly, remember it has taken a lifetime to accumulate your retirement savings, so the last thing you should want is unnecessary risk. Ask your financial advisor about using guaranteed income riders to provide lifetime income without market risk. Knowing you cannot run out of income is more valuable than you might think.
The final part of the equation is to have your advisor compile all of your data and see if you’ve met your retirement needs or if there is a shortfall. If there is a shortfall, your advisor should make it a priority to get you on track with a plan that will allow you to retire as soon as possible, which may require additional saving or reducing some of your spending. The good news is that most people I see are right on track. Once they see all the numbers on paper, they realize they are at the finish line. This doesn’t mean they will choose to retire immediately, but it gives them the confidence that everything will be OK when they are ready.
In my opinion, it’s important to meet face-to-face with your licensed financial advisor at least quarterly. With the ever-changing economy and pressures on the markets, being proactive is the best way to avoid bumps in the road.