How To Know When You Are Ready To Retire
Is there ever such a thing as being ready to retire?
Here at TFS, we believe that the right time to retire is when you find balance and cohesion in your financial and personal life. So how do you know when you’ve reached that state?
Recently, I took off a full month to “practice” retirement. My biggest takeaway was that I need more practice.
In all seriousness, the full month off of work was challenging in more ways than one. Because I had more time on my hands, my wife and I’s spending increased notably. I also found that not having work to structure my day-to-day was frustrating and left me feeling a bit purposeless. Of course, there were also upsides to the month off. My wife and I got to spend more time together, as well as with our family and friends. We traveled, hiked, and I got to practice photography – a hobby I’ve always enjoyed.
The truth is that knowing when you’re “ready” for retirement may be something you have to work toward slowly – and you may never truly know. However, with a diligent plan and remaining true to the people, places, and things most important to you, you’ll be one step closer.
When it comes down to it, retirement relies on two components: finances and values. These two entities work together to help you build a retirement you will love and thrive in. While these factors may seem simple, there are so many considerations and nuances built into each one.
Retirement takes planning, lots of planning. Just like any other big change in your life, such as starting a family, moving to a new state, changing careers, or coming to the end of one, it all takes planning to be executed properly. However, more people end up spending more time planning their next big vacation than they do to plan their own retirement!
We want to help you plan for the retirement life you want and deserve. To help do that, this post will dive into the factors that influence your retirement readiness.
One of the top questions I hear from clients is “do I have enough money to retire?”
That answer depends on your needs and wants for retirement. Some people want to downsize, sell assets, and live a simple life in retirement whereas others want to maintain the same lifestyle they have in pre-retirement. Both of these situations would require a different amount of money.
To get a better idea of the amount of money that would allow you to live a comfortable retirement, you’ll need to consult your expenses. You can do this in two ways:
- Assess the amount you are spending now on housing, food, utilities, vacation, debts, and any additional costs per month and multiply it by 12 to get your yearly costs. Then you would multiply your yearly costs and the number of years you expect to be retired. This will give you an estimated amount of money you may need.
- Reverse engineer your spending and start out with the amount of money you would like to spend per year in retirement, say $70,000 and multiply that by the number of years you’ll have in retirement.
Remember that you’ll also have line items in your budget that change during retirement. For example, any current contributions you make toward your retirement savings will go away in retirement, freeing up more cash flow. Payroll taxes also aren’t charged against retirement income – which can go a long way to increase cash flow for other areas of your budget. For example, if you’re saving 15% of your 401(k), and payroll taxes are 7.65%, your retirement income will be 22.65% lower than your working income without impacting your lifestyle.
Neither option is perfect, nor do they take into account your changing income and other assets but it is a great place for you to start to get an idea of the amount of money you may need.
When you think about how much money you will need to retire, you not only have to take your expenses into account but also your income and cash flow. Your cash flow will change in retirement. While you may still be working part-time or pursuing an encore career, most likely your monthly checks will be lower than when you were working full-time. Be sure to take these income streams into account:
- Social Security
- Your decision on when to retire should factor in your Social Security benefit. Be sure you find ways to maximize your benefit whether that be delaying retirement or retiring early.
- Other assets
Understanding the avenues you have for your finances will be a helpful guide to deciding when the best time to retire is. But as you well know, retirement encompasses more than the finances.
Your values are a key component to deciding when you are ready to retire. For some people when they reach their full retirement age, they aren’t ready to stop what they are doing or move on, they want to remain right there. And there are others who will do anything to retire early and move onto a new phase of their lives. It all depends on your values and vision for retirement.
Values, goals, and priorities drive your financial life and retirement is no different. When you retire, it is important that you feel as ready as you can for this new phase in your life and the best way to do that is to map out your retirement lifestyle.
Do you see yourself downsizing or staying where you are? Are you interested in an encore career or volunteer efforts or other passion projects to fill your time? How do you see yourself making an impact in retirement, whether that be in your own community, family, or beyond? These are just a few questions to get you started working on your desired retirement lifestyle.
One of the most difficult things for people when they retire is feeling uninspired, disconnected, insignificant, and restless. To deter this, plan out a list of hobbies, activities, trips, volunteer efforts, organizations, etc. to involve yourself in when you retire. Keeping your mind and body active is important to your happiness and overall well-being. Giving yourself someplace to retire to will help you feel more secure and stable which will provide you more fulfillment in your golden years.
After reading this post, I would like to ask you to revisit the question at the beginning: is there such a thing as being ready to retire?
At TFS our answer is yes, what is yours?
Give us a call and we would love to help you create your retirement plan.