Every now and then you probably ask yourself, “ When should I retire ?” Is it simply a matter of finances? Or do you retire when you’ve “had enough” and are simple unwilling to take it anymore?
Of course there is no one answer for everyone. But you can ask yourself the following questions and easily come to a better informed conclusion:
1. How much does it cost you to live on average each month?
Before you quit your job, you would be well advised to know if you have the money to start living the life of Riley or not. And to determine if you have enough money to retire, you must first know what it costs you to live.
If you’ve been tracking your spending or using my “5 Minute a Month” method to track your cost of living, you already have a good sense of your cost of living. Just take your current average spending and use an internet calculator to factor in inflation. Since the average inflation is about 3.2% that’s the number I suggest you use.
If you don’t know what it costs you to live there is no way to know whether or not you’ll have enough money to last all your life. So if this is an important question for you, start tracking now. Do not go to step 2 unless and until you know what it costs you to live please.
2. How much passive retirement income (pension and Social Security benefits) will you have?
Once you know how much money you need to retire, the next step is to see how much money you actually will have. This part of the exercise is pretty straight forward. Just get the figures from your HR department and the Social Security Administration.
3. Will you be able to create enough income from your portfolio to make up the difference?
When you retire, you probably will need to dip into your savings. Don’t feel bad about that. That’s why you worked so hard and that’s what it’s there for. The question is, how much can you withdraw?
For argument sake, let’s say you have $500,000 saved and plan to draw 4% from that account each month. That’s $20,000 a year you can count on as portfolio income.
Neal’s Notes: Your allowable withdrawals will depend on your retirement portfolio allocation. Make sure you don’t sell yourself short by investing too conservatively once you retire.
4. If there is a short-fall, can you make up for it by working part-time, spending less or a combination of the two?
As you can see, this is pretty straight forward. It’s not complicated at all. It’s a matter of comparing your resources (passive income from pensions and Social Security and portfolio income from investments and real estate) to your use of resources (average cost of living, accounting for inflation). If there is a short-fall you have to do something about it. You can either:
- Spend less
- Earn More
- Work Part-time
- Some combination of the three.
Once you go through this exercise you’ll know if you have enough money to retire or not. If you don’t have enough money and you really want to retire, you have to find a way to either work the 4th step until you can make the math work.
That may mean downsizing your house, moving to a less expensive area, working part-time or some combination of the above as I said. If you are dying to retire but there is no way you can afford it, I have bad news. You can’t retire. It might be time to consider changing your career to make more money. Or it could mean that you have to go back to sharpen your pencil to find more cuts. The one thing you do not want to do is to ignore the reality of your situation and retire because you want to but then learn the hard way that it was a mistake.
If you don’t have the money please don’t even think about retiring. You’ll be very sorry eventually. And most likely it will be too late by the time you realize it.
But for our discussion, let’s assume that you do have enough money to retire. The question remains. Is it time for you to retire now?
In order to answer this, you have to ask yourself what you would do with your time. If you can afford to retire and you would prefer to spend your time doing something else you should retire immediately. Life is way too short to waste it doing something you don’t enjoy – especially if you have the resources to do something else.
But if you love what you do, why would you consider retiring just because you could afford to do so? To me it makes no sense. That’s why I have no plans to retire – ever. I just love what I do. I can’t imagine doing anything else with my time than what I currently do.
One of my favorite 90 year olds is a CPA who owns a great deal of real estate in Los Angeles and has a very healthy portfolio as well. He isn’t lacking anything. When I want to speak with him I have to call his office because that’s where he is – at work. Not because he has to be there. He is there because he wants to be there.
It might be smart for some people to scale back and work less once they have enough money. But to retire completely just because you can isn’t appealing to many people.
I have been working with retirees for over 29 years. I’ve seen plenty of people who retire and travel, volunteer and basically party. They are loving life because they a) had the money to retire and b) knew they wanted to do something else.
The people who retire successfully meet these two criteria. The people who are miserable in retirement are those who either don’t have enough money to last over the long haul and/or don’t have an alternative use of their time that excites them.
If you are retired, how did you know it was the right time to do so? In retrospect, did you retire at the right time? What would you do differently?
If you haven’t already done so, when will you know when it is time to retire?