Deciding when to retire is never a simple decision; some people, for example, want to be able to continue working for as long as possible due to a love of their job, while others would rather leave the workforce as early as they possibly can. However, whatever your preferences in terms of work, there is one aspect that influences your retirement date first and foremost: finances.
How can you decide if your retirement income is sufficient?
There’s no absolute method of predicting if your retirement income will be sufficient; there will always be variables at play. However, as a general guide, retirement is an option if your retirement income exceeds your expenses.
There are three main contributors to retirement income: Social Security retirement benefits (provided you are over the age of 61 and eight months), a company pension from your employer, and personal savings – the last of which may provide income in terms of interest or dividends, or by withdrawing a set amount each year (withdrawing 4% per year is usually thought to be a good starting point) to supplement Social Security and your pension.
How can you calculate how much you will spend in retirement?
This, of course, is the big question, and it is one that many people struggle to predict. However, you can get an idea of your potential retirement expenditure by looking at your current budget.
Start by first subtracting any work-related costs from your existing expenditure; for example, the cost of your commute or professional clothes. Next, look at expenses you don’t currently have, but that might apply if you are retired; many retirees, for example, like to travel more than they did while working, so your budget in this area may increase. It’s also helpful to get an idea of how you plan to meet any care-related needs, and also allowing extra expenditure in terms of healthcare costs. After these adjustments, you should have a rough guide of how much you can realistically expect to spend when retired, which you can then compare to your projected retirement income.
What if your current projected expenses are higher than your retirement income?
If you are hoping to retire but your income does not cover your budget, then you have a few options. The first is to work for longer, and to save more of your wages than you currently do. You may also want to consider investing to bolster your savings.
Alternatively, you can look at your budget and see if there’s any area you may be able to cut back on. While it’s important not to remove essentials such as health insurance or moving to a retirement facility from your budget, you may want to cut back on entertainment-related expenses or perhaps plan to travel less in retirement. Ultimately, it’s all about what you feel more comfortable with: working a few more years, or cutting back your expenses to make the math work. Neither choice is “right”; you have to go with what works for you.
The above should be a helpful starter guide to calculating the finances of retirement, so you can plan for the future and decide the right strategy for you.