Have you ever wondered how much you need to retire or asked yourself, can I retire yet? Well, the general take on retirement is that we need to have a million dollars. We hear it in the media, we see it on the news, we read it in the finance books. But from your own personal perspective, do know how much you really need to retire based on the things you want to do with YOUR life? Let's talk through this a little bit.
Can I retire yet? Here's how to tell
There are many things to consider when asking yourself, can I retire yet? You need to be sure you are financially ready to cover your essential living expenses. You also need to have enough funds to retire comfortably. Maybe you want to travel and see new places after you retire. You need to be sure this fits into your retirement plan, and you are financially equipped to do so. Here’s what to consider and how to answer your curious question of "can I retire yet?"
You are able to pay your bills
When deciding about retiring from work, you need to be sure you aren’t struggling financially to cover your core utilities and daily living expenses. Your basic living expenses include:
- Housing expenses
- Healthcare Costs & Prescriptions
Before you decide to retire, you need to calculate your living expenses to ensure you have enough to comfortably cover all expenses. Financial Advisors recommend the 80% rule when planning for retirement. This means that you have 80% of your pre-retirement income to live on for your retirement. To achieve this goal, you'll need to grow your money by saving and investing to reach your income goal for retirement.
There are no major life expenses coming up
Major expenses such as purchasing a home or college tuition may mean retiring from work might need to wait a while. Paying off a mortgage loan can take 15-30 years, depending on your income and pay off strategy. If you plan on paying for college tuition for yourself or your child then retiring may be delayed a bit. Depending on the amount of college tuition and the amount borrowed, some student loans can take a while years to pay back.
Other major expenses such as home repairs or renovations and buying a vehicle can prolong retirement. However, if you have no major life expenses coming up, then retirement may be possible for you to consider.
You have minimal debt
You need to consider how much debt you have when asking yourself, can I retire yet? To retire comfortably, you will need to have minimal debt. One of the primary debts to have paid off to ensure financial stability is to have your home paid in full. This is a tremendous peace of mind and expense that can enable you to have a successful retirement, hopefully without returning to the workforce.
You also want to have no credit card debt and be able to pay your balance in full every month. Credit card debt is expensive and can rack up thousands of dollars in interest if not used correctly. Be sure you have little or no credit card debt when considering retiring from work.
Again you want to be sure your student loans are paid off if you have any, along with other major debt such as vehicles, personal loans, etc. Being debt-free is one of the main things to consider when asking yourself, "can I retire yet?"
You qualify for social security benefits
Social Security is a federal benefits program created to provide partial replacement income for those that qualify. The qualifying age to begin collecting your social security benefits is 62. The amount you receive depends on your lifetime earnings and the amount you have paid in each year. By knowing how much you will receive in social security benefits, you can determine the additional amount of income you will need to retire. Learn more about qualifying and filing for social security benefits here.
Retirement savings are in place
Having retirement savings in place is your ticket to retiring from work and possibly early retirement if you plan it right! Saving for retirement takes time but also having an effective savings strategy is key. A good rule of thumb to know if you have enough in your retirement savings portfolio is to multiply your annual income by 25, and the total is the amount you need to retire. For instance, if you want to withdraw $25,000 per year from your retirement savings, you multiply that by 25, which equals $625,000.
This does not include income from social security, rental properties, or other income. Knowing how much retirement savings you need in place can help determine when retiring from work would make sense for you.
A long term financial plan is in place
Just like budgeting before retirement, you will need to be sure you have a long-term financial plan in place when you consider retiring from work. A common mistake among retirement planning is not considering inflation on the cost of living, healthcare, and more. In the U.S. annual inflation rate is around 2.24%. This means that the cost of goods and services will increase by this amount, which in turn costs you more money for living expenses. By planning for inflation, you can prepare for rising living costs and have a financially successful retirement.
Although you won’t have to pay Social Security and Medicare taxes on withdrawals from your retirement accounts, you will still have to pay state and federal income tax. Depending on what tax bracket you are in is the percentage of taxes you will pay. It can range from 10%-37% depending on your income, and this can add up to thousands of dollars deducted out of your retirement savings. Being savvy about your long-term financial plan for retirement can prepare you for inflation of living expenses and paying taxes on your income.
Retiring from work: Determining how much you need
Now you know what you need to have in place to retire, let's go over how to determine what it will truly cost you. If you were to think about things on a monthly basis, how much money would you want to have available to spend a month in order for you to feel comfortable when you are in retirement? (Assuming today's value of money).
This monthly amount should include things like your living expenses, travel, fun, and eating out. Basically the cost of all the things - your essentials plus fun - that you'd like to be able to afford for a full life when you are retired. Let's break it down.
Step 1: Determine how much you'd need on a monthly basis to live comfortably in retirement
The first thing you want to determine is how much you need to live comfortably. Keep in mind many retirees who can afford to never really retire 100% because they get bored and so they usually have part-time jobs or businesses. So when you think of that monthly amount, consider that you may have additional income coming in from a job or business. The assumption here is that you are already planning for retirement.
Take that monthly amount you've decided on and multiply by 12 so you know how much you'll need each year. So, for example, let's say you decide on $5,000 a month multiplied by 12 months that equals $60,000 a year. This is how much you'll need to live comfortably (let's also assume this number is after taxes).
Then take that $60,000 and multiply it by 20 years, which is the average length of retirement. You'll get $1.2 million dollars. This amount is how much you'll need to save for your retirement. In order to make sure you are factoring in taxes, you'll want to add on a tax rate of at least ~25% to this so you can cover your annual tax bill when you start to make withdrawals.
This would bring the amount you'd need to save to $1.5 million before taxes. FYI - Your annual tax rate will depend on how much you withdraw as income from your retirement accounts.
Step 2: Project what you are currently saving for retirement now into the future
Next, you'll want to determine if your current savings will amount to how much you'll need in the future. To determine this, You also need to find out how much you should be saving on an annual basis to ensure you meet your long-term retirement goal.
Your calculation will, of course, need to factor in inflation, and a good retirement calculator like this one can help you with that. Looking at things this way helps give you perspective on how much you need to save. This exercise is not to scare you. It is to motivate you to create or adjust your long-term savings and investment strategy.
The good news is that you don't have to save every single dollar for retirement if you contribute consistently to your retirement account and invest your contributions. Investing over time will allow your money to compound and gain returns, which means your money is at work and growing for you!
Time is one of your greatest assets, and while you have it on your site, you want to get to work building long-term wealth by:
By ensuring you have everything in place beforehand you can help answer your question can I retire yet? Be sure that you have your retirement savings in place, you’re out of debt, and you have a long-term financial plan for retirement. Remember, the only way you can get ahead is by getting started. You can do it!