Retirement doesn’t start at a pre-determined age. It really starts when a person has the desire to retire and the money to do so. However, it can also begin when a person does not have the choice to choose when they would like to retire.
Most people retire at some point in their sixties with age sixty-six being the average, according to a Gallup Poll. The decision to retire might be based on what your vision of retirement looks like. Is retirement a time when you just no longer work? A period that you still work part-time? Retirement may even be viewed as a stage in life to enjoy the things you did not have the time for while working. The answer to being financially ready to retire begins with your vision of retirement and it starts when you have the money to make the concept a reality.
Adjustments might be required as goals may change due to either financial variations or changes in the outlook of life. Have an early estimate in mind for the requirements to retire based on your vision of what you want retirement to be.
How much money do you need to retire?
The money required to retire can vary according to your perception of how you want to spend it. Yet, there are some basic financial matters to have in order before making the change to either fully retired or semi-retired still working part-time.
How much money do you currently have saved for retirement?
Retirement Assets
Without the funds to live with no work, there will not be a way to survive. If you are considering retirement, you first need to look at your current savings allocated for this purpose. There will have to be enough money to generate an income of some sort. Ideally an income from a combination of assets with a good balance of both tax-deferred and tax-free resources. 401k’s, traditional IRA’s and Roth IRA’s are good examples.
Having additional assets, such as real estate income or a pension, can add to diversification. Although annuities are often given a bad reputation, they also may have a place in certain circumstances along with types of whole life insurance. If these investments were awful for everyone, they would not exist.
Social Security
Social Security benefits may or may not be available yet depending on the age you decide to retire. It may also only be available at a reduced amount. Although surprisingly many Americans believe that Social Security is their full retirement income, this is not the case. It was never intended as full retirement income. Social Security is only a supplement to other retirement assets. For this reason, it is important to not entirely count on this income.
If you have not looked at your estimated benefits that may be available for Social Security, you will need to do this. Their website SSA.GOV has an online portal that will provide this information. Even if you are years away from retiring, you should take a look at your estimated statement of benefits every so often to ensure they are correct.
How much is needed?
Once you are able to calculate how much money is saved for retirement, the next step is analyzing how much money will be required. Not only is this dependent on the vision you have for retirement, but there are some basic items to consider. Many of these you will want to ensure are taken care of before considering retirement.
Debt
Having any debt at all, in general, is not good to carry. This is particularly true once you retire. If there are a lot of debt obligations, these can become difficult to manage on a fixed income. This even includes a mortgage. Studies have shown that retirees are happier in most instances with their retirement income when they do not have a mortgage to pay. You will want to minimize or eliminate all debts before even considering retirement.
Health Insurance
You will need to make certain there is health insurance coverage in retirement. If you have a job with employee health insurance benefits, these will cease to exist when you leave. Medicare has eligibility at age 65, but it will not cover everything that comes up. There will need to be some type of supplemental insurance. Long-term care can also be a concern at some point in time. If you do not already have an insurance policy for this, you will want to look into it before retirement. Long-term care insurance only goes up in price as a person gets older.
If you decide to retire at a young age, full health insurance benefits would be needed for a number of years before Medicare would start to pick up some of the cost. With the rising cost of health insurance, this should be a large piece of research for calculating enough retirement income.
Do You Have Children?
Even if you have grown kids, are they financially independent at this point? Although there does come a certain time when you should no longer be financially responsible for your children, there are situations you might be the person they fall back on. It might be hard to turn them down. After all, once a parent always a parent. Taking money out of your retirement that you do not have to help your children is not a good idea. But you may do it anyway. This is something to consider.
Prepare for Unexpected Things
Just like unexpected things happen while you are working, they will also occur during retirement. There needs to be some type of buffer built-in for this in the income and retirement savings a person has. The amount may or may not ever be enough, but there does need to be some extra money put aside similar to the emergency fund that should be used during a person’s working life. There should also be a retirement emergency fund of some kind.
Calculate the Required Income for Retirement
Taking into consideration the previous items mentioned like being debt-free and having a plan for health insurance, start putting together an estimate of the income you would require in retirement. A sufficient amount of money should be available to take care of housing, food and any additional day to day living expenses. In addition, estimate the time for having a retirement income . How many years will you not be working? Furthermore, if your vision of retirement includes expenses to enjoy entertainment or travel, this also needs to be included.
A number of financial experts will tell you that you need at least 80% of the income you had while you were working to keep a similar standard of living during retirement. This is due to costs generally being lower. Lower costs, such as children no longer dependent and no more debt can make the need for an income less than it was when working full-time. However, the 80% rule is not absolute. It is only an estimate.
If you have never sat down with a financial professional, the decision to do so might be a good one as you near the time you would like to retire. This is not for everyone and is a personal decision. A financial professional, tax advisor and an estate attorney could be helpful depending on your situation. These people can help you better determine how much money you will need in retirement and the amount that you may be able to safely withdrawal in order to not run out of funds. Taking advantage of the best tax withdrawal methods and long-term estate planning can also be helpful.
Final Word
Retirement is not something that only elderly people do. It can start at any age as long as a person has the resources to do it. Although many financial experts use figures, such as having an income of 80% of your working year’s salary to retire on, this is not the same for everyone. It should only be used as an estimate. The retirement income one person may need could be entirely different from another. The income required really begins with a person’s vision of how they want to spend their time once they stop working.
The Retirement Age is Growing
Even though retirement doesn’t start at a pre-determined age, statistically people generally decide to retire in their 60’s with age 66 being the average most people would prefer, according to a Gallup Poll. This isn’t because everyone wants to work until age 66, but it is due to most people not having enough money to retire on. The rising age of people actually being able to retire should not come as a surprise. A study by AARP showed that 90% of workers wish they had saved more for retirement. Add this to the rising retirement age in which a person can collect full Social Security benefits to supplement their income and it is easy to see why people just simply do not retire or work part-time in retirement.
Knowing how much income is required at retirement should not be something that completely waits to be calculated at the time of retirement. It should be monitored during working years. It may grow large enough to retire earlier than expected or it might be a good idea to know if retirement comes early due to a health issue or being forced to take an early retirement package in a profession. Visions of European travels or the discretionary income in retirement to do whatever you want is not likely for most people. There is nothing wrong with having your vision of retirement. Having this goal and monitoring it could make it a reality.
What is your vision of retirement and do you currently have a plan in place?
