Will I Be Able To Retire?
As a Certified Financial Planner, the question clients ask most often is, “Will I be able to retire?” If you do not know the answer, or if you haven’t even thought to ask, I advise that it is imperative that you do. When I am asked this question my initial answer begins, as it often does, with the words… “well that depends.” Why is that my answer? Because there are a number of factors to consider. Below, I outline the two most significant factors.
Two of the Most Important Factors in Retirement
First, how many years will you be retired? Clearly the more years you are retired the more money one will need. Of course it is far easier to know when your retirement may begin (i.e. 65 years-old) rather than to know exactly when it ends (i.e. 85, 90, 95, or possibly longer). An extra 5 to 10, or even 20 years has an enormous impact on the amount needed.
Secondly, how much do you want to spend per month in retirement? Hint: It’s much higher than you may think - see more on that below.
That figure of how much you want to spend may be much higher than what many people preparing for retirement expect to pay, and so it is important to gain an understanding as to why.
Fidelity shared the following in a piece on the subject*:
Expect to spend between 55% and 80% of your pre-retirement income every year throughout retirement depending on your income, lifestyle, and health care costs.
If you plan an active lifestyle in retirement expect to ratchet up your annual retirement budget by 6 percent compared with a less active lifestyle.
Expect 15% of your living expenses to be related to health care after you retire year in and year out.
Fidelity goes on to say that the more money you make, the smaller a percentage of your working income you may need to replace when you stop working.
For instance, a person making less than $50,000 a year before they retire might need to replace 80% of their pre-retirement income so they can cover $40,000 in expenses. Whereas someone making $200,000 may need only 55% of their pre-retirement income to help fund a retirement lifestyle of $110,000 in annual expenses.
Where Retirement Gets Expensive
While some of your expenses may be reduced in retirement, one will likely increase significantly, and that’s healthcare. See my recent blog on unusual financial planning advice: Diet and Exercise.
How Can You Tell If You Are on Track?
Finally, to answer the question of how much money you will need to retire - while the answer is highly subjective a good rule of thumb is to have 10 times your final salary in savings if you want to retire by age 65. For example, if your salary at 65 is $150,000 you should have close to $1.5 Million saved. Note: This estimate does not consider other sources of income in retirement (i.e. pension, rental income, etc.). If you have a pension and rental income you will need less.
That’s Great to Know What I May Need at age 65, but how can I know if I’m on track to have that amount by then?
For those that are years from retirement, below is a general rule regarding what you should have saved at different ages**:
By 30: Have one times your salary saved
By 35: Have two times your salary saved
By 40: Have three times your salary saved
By 45: Have four times your salary saved
By 50: Have six times your salary saved
By 55: Have seven times your salary saved
By 60: Have eight times your salary saved
By 67: Have ten times your salary saved
Factors You Need to Consider
Because this is a general rule, there are a number of factors that one needs to consider to determine what they need to have saved. Consider the following questions:
Will you be receiving an inheritance, or would you like to provide one?
Do you plan to relocate to another state, or even country during retirement?
Will your current home suit your needs as you age?
Will you be carrying a mortgage into retirement, or should you consider paying it off first?
These are just a few of the factors that one needs to consider in retirement. An equally important factor is how your investments are positioned in the first years before and through retirement. You could be on track for having enough saved for retirement, only to have a market downturn wipe out decades of savings. It’s imperative that you make the necessary adjustments. For more details see my blog, “Most Accidents Happen on the Way Down”.
How Can You Know If You Will Be Able to Retire?
When I sit down with clients, I conduct a comprehensive analysis of their retirement readiness and implement strategies that allow them to optimize their upcoming or future retirement. Some of these strategies include when to take social security, reducing taxes via Roth Conversions (Roth Conversion refers to taking all or part of the balance of an existing Traditional IRA and moving it into a Roth IRA), or utilizing unique retirement savings vehicles that allow clients to put much more away towards retirement (>$300,000 in a single year). That is just a start of what we can do.
If you would like to review your retirement readiness with a Certified Financial Planner, and discuss strategies to maximize your readiness, please schedule a free initial consultation by clicking the “Schedule a Meeting” button on my Contact page.
Thank you for taking the time to read this blog. I hope you found it helpful.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
References:
** https://www.fidelity.com/viewpoints/retirement/how-much-do-i-need-to-retire
