Are You Financially Ready To Retire? Answer These 3 Questions To Find Out

December 14, 2017

Do you have enough money to retire? How will you turn your retirement savings into income? These are questions we get quite a bit from people approaching a time that can feel both exciting and terrifying. Here are some things to consider:

1. What will your expenses be in retirement? Instead of estimating, take a look at your actual bank and credit card statements and then record your expenses on a worksheet like this. Most people are surprised to see where their money is actually going and that’s probably not a surprise you want once you’re retired.

Then think about how some of those expenses may change in retirement to create a retirement budget. Are you planning to pay off your mortgage, downsize, and/or relocate? Will you spend less on commuting and eating out but more on travel and other hobbies? What will health care cost you?

2. How much income will you be receiving? You can get a projection of your Social Security benefits online. Unlike the statement you get in the mail, the web site allows you to enter your exact retirement date and when you expect to collect benefits. You’ll also want to get an estimate of any other income you’ll be receiving like pension benefits and cash flow from real estate.

3. How much will you need to withdraw from your retirement savings? Take your projected retirement income and subtract that from your retirement expenses. Then divide that number by your total retirement savings to get the withdrawal rate. For example, if your retirement expenses are $50k and your income is $30k, the difference is $20k. Dividing that $20k by $500k in retirement savings gives you a 4% withdrawal rate.

If your withdrawal rate is less than 2%, you can likely safely retire just by living off the interest and dividends from your investments without touching the principal. A withdrawal rate between 2 and 4% is still considered reasonably safe my most financial experts.

If it’s between 4-6%, you face a significant possibility of running out of money so you may want to purchase an immediate annuity (or choose the annuity payout from a pension plan) to reduce the amount you need to withdraw from your retirement savings below 4%. (A reverse mortgage can be a source of that annuity if necessary.) If the withdrawal rate is above 6%, you’ll need to make adjustments like reducing your retirement expenses or even delaying your retirement.

Of course, there are other factors that can complicate this calculation like taxes and retiring before you’re eligible to collect Social Security. You’ll also want to make sure your investments are properly diversified, that you’re not paying too much in taxes or fees, and that you have adequate insurance protection. For these reasons, you may want to consult with a qualified and unbiased financial planner, but these basic steps should give you a good starting point to see if you’re in the ballpark.

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