Deciding when to retire is one of the most important life decisions you’ll ever make, but how do you know when the time has come?
The “traditional” retirement age is 65, but maybe you dream of retiring early at, say, age 55. Can you afford to retire this early, or should you actually be considering working past 65 to bring in more income and hold off on Social Security for a few years? (If you delay Social Security, you will get higher payouts when you begin taking it.) Then there’s the matter of your retirement portfolio, which may have taken a big hit during the recent recession. Will your nest egg be big enough by the time you want to trade your office casual attire for flip flops and bathing suits? (Learn how to save for retirement on $5 a day.)
You’d think it’d be simple to know when to retire, but in reality, there are a lot of factors to consider, such as:
What is your lifestyle going to cost in retirement?
Is your house paid off? Do you want to travel across the globe and entertain frequently? What kind of uncovered medical expenses do you expect? Before you can even think of retiring, you must get a grasp on what your expected expenses are going to be. You need to ensure that your savings and income will be able to cover your costs for the rest of your life.
Start by putting together an estimated annual household budget for your retirement years.
What sources of income will you have?
During retirement, your savings will be supplemented by your income. Starting at age 62, you will be eligible to receive Social Security payments. You may also receive a pension from your employer. Other common income streams are rental income, royalties, consulting fees, and even income from part-time work.
How much have you have accumulated?
The final piece of the puzzle is determining how much savings you will have. Sources of retirement savings often include IRAs, 401(k) plans, and taxable accounts. (Confused about 401ks? Read 401(k) Plans Explained.)
Now you have all the pieces. You know how much money you will need on a monthly basis to finance the retirement you want. Look at your savings and income and figure out how many years of retirement they will cover. (According to the Social Security office, a woman who turns 65 today can expect to live, on average, 86.6 years.) Can you afford to retire?
What if you haven’t saved enough to retire?
If the rate at which you withdraw money from your retirement portfolio is too high, you run the risk of depleting your money resources before you die, which will likely result in uncomfortable adjustments to your lifestyle.
If you determine that your income won’t cover your expenses, you’ll have to make some hard choices, including:
- Delaying retiring while you add to your personal savings and increase the amount you can collect from Social Security
- Change the investment mix in your portfolio to potentially increase your rate of return.
- Aim for a less expensive retirement lifestyle
- Choose partial retirement (part time work) to slow the depletion of your savings
For even more great information on retirement, view our growing archive of retirement articles just for women.