how to know if you are ready to retire

Knowing the right age and time to retire is not always easy. If you are agonizing over the question of whether you are ready to retire, this article is for you. We will help you examine that question from all angles and come up with the decision that is best for you.

The Myth About the ‘Right’ Age to Retire

First, let’s dispel any notion that there’s a “right” age when you should retire. Peer pressure and family expectations push many people to consider retiring between ages 62 and 65. If you keep working many years past 65, friends begin to ask why you aren’t retired yet, as if it’s a problem. It’s like a young married couple who feel pressured by parents and peers to start a family. There’s no “right” answer for them either, but the pressure builds every year they delay.

The “right” age to retire is a very personal decision. If you are in the 62 to 65 age range, still enjoy working, and are not eager to retire yet, then keep working. That’s fine. If you are 70 and still aren’t ready to stop, that’s OK too. On the other hand, if you are age 60 or even less, can’t wait to stop working, and have the financial means to retire today, then do it if that is what you want. It’s your life and your decision. For married couples, the decision gets a bit more complicated, since you have to consider the age, health, and retirement wishes of your spouse.

For most of us, the urge to retire is going to hit somewhere in the 60 to 70 age range. For an unfortunately high percentage of Baby Boomers today, the decision isn’t always theirs to make. Layoffs happen, businesses close or get bought out, and early retirements are forced upon us. The COVID economy has made layoffs of older workers even more common. Finding comparable full-time employment again after a layoff at age 55 or beyond isn’t easy. Age discrimination is all too real. (See related story: “7 Secrets To Staying Employable Past Age 50.”)

Are You Ready to Retire?

Are you ready to retire? The answer to this question is multi-faceted. To adequately answer it, you must assess each of the following:

1. Are you financially able to retire yet?
2. Are you ready to stop working?
3. Have you pondered the emotional aspects of retiring?
4. What will you do next if you retire?

Let’s look at each question separately to help you decide your retirement readiness.

#1 – Are You Financially Able to Retire Yet?

This is the question most pre-retirees wrestle with the most, but in many respects it is the most clear cut and easy to answer of the four questions. It’s a math problem, so let’s break it down.

• How much income will you need per month after you retire? A good place to start is to look at your current household budget. Come up with a realistic figure for how much you spend now each month. Then, look at how your expenses might change after you retire. The traditional rule of thumb is that in retirement you can live on 75 percent of your previous income. You won’t have to keep saving for retirement, for instance. That alone could mean a 10 to 15 percent savings. For most new retirees today, the 75 percent rule is probably too low. For the average new retiree, a better estimate would be somewhere between 80 and 90 percent of pre-retirement income. Individual circumstances differ greatly. If you commute into a major city, pay downtown parking fees, and wear dry-clean dress clothes to the office, then it’s realistic to expect your post-retirement budget to be considerably less than you spend now. On the other hand, if your retirement dream is to play lots of golf and travel extensively, you may spend more in the initial years after retirement. In fact, spending more (not less) in the first few years of retirement than during the final working years is not that unusual. Spending often slows later in retirement, when you travel less and become more sedentary. So the first step in resolving the financial question is to estimate your expected monthly budget during your first year of retirement.
• What sources of retirement income will you have available? The next step is to estimate how much income you will have when you retire. Those approaching retirement often fail to consider all of their sources of income. Even many financial services companies overlook the role of Social Security when advising clients about how much income they will need to generate from their savings during retirement. Despite Social Security’s well-publicized problems, we believe you can count on Social Security to be around for the rest of your lifetime. The worst-case scenario is that benefits might get reduced a decade from now, but even that is not a high probability for people who are now 60 or over. Don’t forget to include Social Security income when tallying up how much money you will receive each month after you retire. For lower and middle-income households, Social Security is often the largest source of retirement income. Not sure how much your monthly Social Security benefit will be? Visit the Social Security website and complete the retirement benefit estimate. The average Social Security retirement check is $1,503, but those who paid in at the the maximum rates can expect to receive about twice that much. After getting an estimate of your expected Social Security retirement benefit, next list any other sources of income that you (and your spouse) will receive after retirement. Do either of you have any pension plans, which are rare these days in the private sector but still common for many retired military and government employees and school teachers? Do you have any insurance annuity contracts that pay (or will begin paying) you income during retirement? How about income from rental real estate, non-retirement investments, or other sources? Do you have a hobby or part-time job (often referred to these days as a “side hustle”) that will continue to generate income after retirement from your main job? Add all of these income sources together and see how your expected retirement income compares so far with your expected expenses. But don’t despair yet if you don’t have enough income to retire. We will next explore how to estimate expected income from your IRA, 401(k) or other retirement savings accounts.
• How much retirement savings do you have? If you are the typical person and had several jobs during your career, odds are good that your retirement savings are scattered among two or more accounts. Plus, your spouse may have multiple retirement acounts. In addition to 401(k) and Individual Retirement Account (IRA) Rollover accounts, you may have other traditional or Roth IRA accounts, or maybe retirement annuities. Gather all of your most recent statements (or check online balances to get the most up-to-date totals) and add up how much these accounts are worth. To keep life simpler, this may be a good time to consider consolidating these accounts. It will make it easier to track balances and monitor performance and will reduce paperwork.
• How much income can you safely generate from your investments during retirement? Perhaps the most difficult financial question to answer is this one, “How much income can you safely generate from your investments during retirement?” The traditional answer, based on extensive analysis first done in the 1990s, is that you can safely take 4 percent from your retirement portfolio in the first year of retirement, and then modestly increase it each year to keep up with the rising cost of living. Research confirms that, based on historical returns, you could have safely followed this advice and rarely ever run out of money during a projected 30 years of retirement. Those results were based on a portfolio consisting of 60 percent stocks and 40 percent bonds. So how much income is 4 percent? If you have $500,000 in retirement savings, then by following the 4 percent rule you could safely withdraw $20,000 during your first year of retirement. For a $1 million portfolio, you could withdraw $40,000. While the 4 percent rule is still often used, many financial planners now caution it may be too high for today’s retirees. Why? In large part because interest rates on bonds today are at historic lows. The portion of your portfolio devoted to bonds isn’t going to earn much for you. Add to that the fact that the stock market has outperformed its averages during the past decade and is currently trading at lofty levels. While no one knows, chances are good that the stock market will underperform in the decade ahead. So what should a retiree do now? Many experts advise withdrawing 3.0 to 3.5 percent for income in the first year of retirement, increasing it each year thereafter to give yourself a cost-of-living boost. To compare with the above example, a $500,000 retirement portfolio would generate $15,000 of income in year one at 3 percent; a $1 million portfolio would generate $30,000. If you wait until age 70 or later to retire, you might still be able to safely withdraw 4 percent or slightly more from your retirement savings each year, on the assumption your money only needs to last 25 years rather than 30. If the IRA or 401(k) isn’t your main source of retirement income and you are willing to take a more aggressive stance, you might also achieve better results by reducing the percentage of your portfolio invested in bonds. For instance, a 70/30 split instead of the more traditional 60/40. Before leaving this topic, if your financial advisor is suggesting you can safely withdraw 8 to 10 percent of your portfolio each year during retirement, run (don’t walk) for the nearest exit. Unfortunately, there are advisors out there touting such yields, but you run a high probability of running out of money in the later years of retirement if you follow their advice. Don’t fall for it.

Adding up the numbers

So can you afford to retire now? Let’s look at an example and see how the numbers add up.

Assume you earn the average Social Security check of $1,503 per month. Your spouse expects a pension or annuity that will pay $800 per month, plus $1,100 in his or her own Social Security benefits. Add to that the $1,250 that your combined IRA and 401(k) balances of $500,000 will generate each month using an initial 3 percent withdrawal rate. That’s a total of $4,653 per month, before taxes, or $55,836 annually.

Sources of Monthly Retirement Income:

Your Social Security: $1,503

Spouses’ Social Security: $1,100

Spouse’s pension or annuity: $800

Income from IRAs and 401(k)s: $1,250

__________________________

Total monthly income: $4,653

What can you do if that amount falls short of your expected expenses? Consider these ways to make your income and expenses match:

• Continue working another year or more. By delaying your retirement age, you will not only have more time to accumulate money but your Social Security check, once you start drawing it, may be higher. The amount you will receive goes up by about 8 percent per year for each year you delay the start date from ages 62 to 70. Hold out until age 70, or as close to that age as possible, to maximize your Social Security benefits.
• Pay down your debts. It’s best to enter retirement debt free, including paying off your home mortgage. That can significantly reduce your monthly budget and provide greater peace of mind. Even if paying off your home mortgage isn’t possible, you should make it a priority in your final few years of work to eliminate all consumer debt including car loans and credit cards. Once that is done, get aggressive with your mortgage, paying extra on your principal with the goal of getting it paid off as quickly as possible.
• Reduce your living costs. Move to a smaller or more efficient home, perhaps in a state with lower taxes. Go through your budget and slash expenditures that are no longer necessary. Pare down from two cars to only one.
• Consider part-time work after retirement. If you still need more income to match expenses, you might be able to at least retire from full-time employment if you continue to work part time. Many retirees are happier with a part-time job and consider it the best of both worlds. You get the financial, emotional and social benefits of working but still enjoy more free time and less stress.

 #2 – Are You Ready to Stop Working?

For many of us, work defines who we are. It is how we spend the majority of our waking hours and it provides purpose and a sense of accomplishment. While some older workers can’t wait to quit, others love their jobs and have no desire to stop. Perhaps you are a professional person who has built a practice in business, law, or a medical field. Or perhaps you started a business from scratch many years ago and it is now thriving. You may not be ready to walk away from these endeavors just because you are in your 60s. In another story on This Retirement Life, we wrote about people who have made some of their greatest accomplishments late in life. You may find reading this story inspirational if you are wrestling with the question of whether to continue working or not. You can read it here.

Work vs. retirement doesn’t have to be an either/or proposition. You can do both. Many who are approaching retirement age find it beneficial to move gradually toward full retirement by first transitioning from full-time to part-time work. As discussed above, continuing to work part time also provides financial benefits, especially if you haven’t saved enough over the years to fully fund your retirement.

Health and family circumstancs may play a big role in your retirement decision. Are you in generally good health and feeling well, or have various ailments or more serious disease taken their toll? Do your children need your help caring for the grandchildren? Do you have a spouse in poor health who needs your full-time attention? All of these factors may weigh on your decision of whether to retire now or continue working.

#3 – Have You Pondered the Emotional Aspects of Retiring?

Retiring from our careers is a major life-changing event. It is a difficult transition for many workers. Not only is your sense of value and self-worth upset, but when you leave a job you leave behind a social network. Your work associates may be who you talked with during the day and who you went to lunch with. Your consider them to be your friends. Once you retire, however, odds are you won’t hear often, if ever, from those co-workers again. You will be out of sight and out of mind. Once the newness of being retired wears off, you may feel lonely, depressed, and no longer of value.

To cope with these emotional aspects of retirement, start developing groups of friends outside the office and activities that aren’t office-related. Build structure into your daily routine. Have things to do and places to go each day. If you are married, share your feelings with your spouse. Let him or her know how being home all day and not earning a paycheck is affecting you.

# 4 – What Will You Do Next If You Retire?

Those who are most satisified with their retirements stay very busy and are actively fulfilling their dreams. While “doing nothing all day” may sound appealing when you’re still working 40-plus hours a week at a job you no longer enjoy, idleness isn’t much fun either, once the newness of retirement wears off. Without meaningful activities and a purpose, life as a retiree can lead to boredom, depression, and declining health.

Ideally, you want to spend the final three-to-five years of your working career thinking about what you want to do when you retire. Do some research and list your goals on paper. Discuss them with your spouse, or maybe with your adult children. What makes retirement special is that it is the first time in your life that you’ve had the luxury to pursue your own unique goals, at your own pace. If you have dreams yet to fulfill, now is your chance. Go for it. (See our related blog post, “Why Retirement May Be the Best Stage of Life.”)

No two retirees will follow exactly the same path, and that’s the way it should be, but here are some common goals and activities that successful retirees pursue:

Goals and Activities for the Retirement Years:

Helping others: Volunteer or church work

Caregiving, including watching or helping raise grandchildren

Starting a business

Turning a hobby into a business

Pursuing a sport or hobby at a more intense level

Taking (or teaching) university classes

Write a book

Learning a new language

Moving internationally to experience a different culture

Whatever activity, or combination of activities, you choose to pursue, the point is to be proactive in following your dreams and finding purpose and satisfaction in your life. With a positive attitude and a well-thought-out gameplan, retirement truly can be the BEST stage of life!

Hopefully this article will help you assess your readiness for retirement, looking at it from all angles. What is your story? Are you considering a future retirement? Are you already retired? We would love to hear your stories and learn from your experiences. Please leave your comments below. You may also want to share this story with a friend who is contemplating retirement, or share it with your followers on Facebook or Twitter. Just click the share buttons to send this story to your favorite social media site or by email. Thank you.

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