Can I Retire Now?

Can I retire now

It Depends…..

If you’re nearing retirement age, the question, “Can I retire now?” may be top of mind for you.  I get asked this question a lot and unfortunately, my initial answer almost always has to be, “It depends….”

When my clients start thinking about this question, we have a preliminary discussion about the key factors that affect this decision.  The top 5 are:

  1. How much money have you saved?
  1. What kind of standard of living would you like to maintain?
  1. What sources of income will you have? Social Security only or will you also have one or more pensions?
  1. How old are you now and how long do you plan to live? I typically recommend that we plan through at least age 90, if not 100, unless your parents and grandparents had significant health issues.
  1. What kind of investment returns can we expect? This one’s not in your control, but is a critical part of answering, “Do I have enough money to retire?”

Getting Started – A Quick & Dirty Method

So, maybe you just want to know if you’re even in the ballpark and are looking for some basic rules of thumb.  In the 1990’s, William Bengen developed “The 4 Percent Rule” which basically states that retirees can withdraw 4% from their investment portfolios each year and never run out of money.

More recent research indicates that this may not be as reliable an estimate as initially thought.  Depending on your circumstances, withdrawing 4% may be too aggressive and result in the depletion of all of your financial reserves in retirement, particularly if financial markets drop significantly early in your retirement years.

However, there also are some circumstances where you might be able to withdraw from your savings at an even higher rate, particularly if you’ve worked into your 70’s and have a shorter retirement planning horizon.

Let’s Do Some Math!

Regardless, here’s how you can use the 4 Percent Rule to put a finger in the wind as you are nearing retirement age.

Let’s say you:

  • Are 70 years old
  • Are eligible for a monthly Social Security Benefit of $3,500 per month
  • Are married and have a spouse who is eligible for a Social Security Benefit of $2,500 per month.
  • Have $750,000 saved in retirement assets.
  • Estimate that you need an income of $100,000 before taxes to maintain your desired standard of living.

Using the 4 Percent Rule, you’ll be able to withdraw $750,000 * 0.04 or $30,000 per year from your investment accounts for living expenses.

To this, add your annual Social Security benefit of $3,500 * 12 or $42,000.

And also add your spouse’s Social Security benefit of $2,500 * 12 or $30,000.

Total it all up ($30,000 + $42,000 + $30,000) and you get $102,000, which is slightly more than you need to cover that $100,000 in estimated annual living expenses.

Interpreting Your Results

Scenario 1: Pack Up the RV!

If you plug your numbers into the 4 Percent Rule and can cover at least 1.5 times your projected living expenses, it’s probably OK to grab the golf clubs and fishing rod.  Confirm your math with your financial advisor and congratulate yourself on a job well done with your retirement planning!

Scenario 2: Pack Up the Briefcase…

If you’re on the opposite end of the spectrum and can cover less than half of your projected living expenses, it’s probably time to revisit your assumptions given the current reality of your finances.  Put a plan in place to do one or more of the following:

  • Delay retirement a few years by staying with your current job. This will enable you to accumulate more money in your retirement accounts and reduce the number of years you’ll need to draw from your savings.
  • Pursue an encore career either part- or full-time to supplement your income.
  • Consider a reduced lifestyle versus what you’ve initially planned. You can explore moving to a lower cost of living area or think about going out to dinner twice a month instead of twice a week.  Weigh the benefits of working a few more years versus trimming down expenses and decide which is preferable to you.

Scenario 3: Take a Closer Look

If you’re somewhere in the middle and can cover between half and 1.5 times your projected living expenses when you use the 4 Percent Rule, reach out to your financial advisor for help with putting together a comprehensive retirement plan.  Your advisor will take all factors into consideration and help you understand exactly where you stand in terms of retirement.

Your Assignment:

If you’re asking the question, “Can I retire now?” grab a pencil, some paper and a calculator and take 10 minutes to work through the 4 Percent Rule.  Knowing where you stand can help you decide your next course of action as you plan for what I hope is a wonderful and fulfilling retirement!

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