A happy retirement is certainly deserved after years of hard work. There’s a good chance you’ve already been daydreaming about it, at least a little bit. Are you going to travel the world, volunteer for a charity, go fishing, or spend more time with your grandchildren? There are endless possibilities.
Still, many workers are apprehensive about retirement. Too many horror stories have been told about people who retire too soon and find their income and lifestyle severely restricted. In the 20th Annual Transamerica Retirement Survey of Workers, published in 2020, 40% of Americans said they feared outliving their retirement savings and investments. The ongoing COVID-19 pandemic has added another layer of complexity for many retirees because of the economic fallout.
When is the right time to act? If you’re ready to retire, here are six signs.
1. You’ve reached full retirement age.
To qualify for Social Security benefits, if you were born between 1943 and 1954, your full retirement age is 66. After 1959, you must wait until you are 67, and there are 66 months between those dates. Even though you can claim your Social Security benefits as early as 62, your benefits will be higher if you wait until full retirement age. Starting your retirement benefits at 62 reduces your monthly payment by 25%.
Conversely, if you wait even longer to claim Social Security-the maximum age of delay is 70-you’ll receive 132% of the monthly benefit you would have received at full retirement age.
Early Social Security benefits will also reduce any survivor benefits your spouse will receive after you die. It could be a severe financial blow if your spouse outlives you for many years.
2. You’re Debt-Free
Your retirement is well positioned if you’ve paid off all your debts. Your days of freedom may be postponed if you owe a lot on a home or car or have credit card debt.
Paying a hefty mortgage or car payment on a fixed income can be a major strain, and unexpected expenses are also more challenging to handle. It would be best if you tried to pay off most of your outstanding debts before you hand in your retirement notice.
3. Supporting kids or parents is no longer your responsibility
Are your kids grown up, out of the house, and earning their own money? You will be able to retire much more efficiently as a result. If you still support your kids or help them regularly, you may want to put your retirement plans on hold. Furthermore, you might consider holding onto your job if you have elderly parents in need of your financial assistance.
College and housing costs continue to rise, making it more difficult to support aging parents or kids at home. Dias Wealth LLC founder and managing partner Carlos Dias Jr. say a married couple cannot downsize and reduce expenses if they have a family.
4. A retirement budget has been created
Even though it may seem obvious, many soon-to-be retirees don’t do the math. Knowing whether your post-retirement income will allow you to live comfortably is important before quitting your job. Calculate monthly expenses, such as rent or mortgage, groceries, electricity, and other services. Consider your “wants” as well, such as travel, entertainment, dining out, and shopping. It’s time to determine whether your income will sufficiently cover your estimated monthly expenses. Estimate your Social Security benefits, retirement account distributions, pension payments (if you will receive them), and other income sources. Taxes are due on all distributions except Roth IRAs, Roth 401(k)s, and Social Security (except if you meet the income threshold for tax-free Social Security benefits).
Most financial planners recommend replacing 70% to 80% of your pre-retirement income when planning for retirement. When budgeting, it’s essential to factor in inflation, also known as the Consumer Price Index (CPI). Buying bread for 25 cents is a thing of the past. There is no guarantee that inflation won’t rise in the future, even though it has been relatively modest in recent years, roughly 2 to 2.5% per year. As of January 2024, CPI was 7.5%. Medical expenses, for example, can have high rates of inflation. Expenses for healthcare during retirement are often overlooked when planning one’s retirement budget. You should consistently earn enough to cover the cost of inflation with your retirement plan savings. Social Security offers cost-of-living adjustments (COLA), but most pension plans do not.
Now that you have figured out your retirement budget, you need to estimate how much income you will need to cover those costs. Depending on your situation, your income sources may include retirement savings, Social Security, and a pension. Another critical rule of thumb when determining how much income you will have in retirement: If you retire in your mid-60s, your retirement budget should not exceed 4% of your investments plus Social Security and pension payments. Can you cover your monthly expenses, including at least some of your wants? You might be ready to retire if this is the case.
5. Updates to your portfolio have been made.
Have you reviewed your investment portfolio? A person’s ability to live off their savings at retirement depends on three factors:
- Savings or investment portfolio size at retirement.
- The future growth rate of the portfolio (average annual return).
- The amount of withdrawal or consumption the retiree will need to maintain this lifestyle (or not), says Jeff de Valdivia, CFA.
In case you haven’t done so yet, now is the perfect time to review your portfolio. You may not have as much of a nest egg as you thought if your portfolio suffered a major decline. The consequences of the COVID-19 pandemic on retirement security are still unknown. To protect your retirement wealth, you may also want to shift to a more conservative investment strategy as you near retirement.
You may benefit from the assistance of a financial advisor when reassessing your portfolio and determining if adjustments are needed.
6. Your Spouse Agrees
If you don’t live alone, retirement affects everyone. The decision to retire should be made together with your partner.
Discuss how your partner will be affected by the reduction in your income. Together, you’ll be more likely to enjoy a fulfilling retirement if you’re both financially and emotionally prepared. The loneliness of retirement may be much greater if your spouse plans to work for many years. Alternatively, retiring simultaneously if both partners have jobs can be financially and psychologically stressful. Identify the best time for each of you and both of you.
When you retire too early, you won’t be able to enjoy retirement to its, fullest-especially if you have to re-enter the workforce out of financial necessity rather than choosing to do so. Make sure you plan your retirement carefully to make the right decision.