Ask Real Deal Retirement
I’m nearing retirement age, but I have no clue as to whether I’m financially ready or not to retire? What do you recommend I do?
You’re not the only person who’s clueless about whether he has the financial wherewithal to call it a career. A recent study by the Boston College Center for Retirement Research found that more than 40% of working-age Americans had an unrealistic idea of whether they were on track for a secure retirement. What was especially interesting about the study though, was that nearly half of that group was overconfident about where they stood, while the remainder thought they weren’t prepared but actually were in decent shape.
To better plan for retirement, you need to have an accurate sense of where you stand. And the only way to do that is to crunch the numbers.
If you think you’re within five to 10 years or so of retiring, you should start by doing a retirement budget. Your budget doesn’t have to be accurate down to the last cent; you can always revise it later on. Rather, the idea is to estimate as best you can the costs you’ll face once you retire, especially when it comes to biggies like housing and health care as well as other basic living expenses.
You can create a budget using a pencil and paper, but you’ll probably find the process easier (and you’ll be less likely to overlook expenses) if you do it online. BlackRock has a Retirement Expense Worksheet that allows you to enter outlays for some 50 different line items in eight categories ranging from essential expenses for household and medical costs to more discretionary expenditures such as those for dining out, entertainment and charitable contributions.
While you’re doing your budget, you might also take some time to think about the lifestyle you expect to live after you retire. Do you plan to do a lot of traveling or stick to close to home? Might you stay in your current home or downsize to a smaller house that will be easier and less expensive to maintain? Move to a different part of the country or stay where you are? Such lifestyle choices can have a direct effect on the amount of income you’ll need to fund your retirement. So to the extent you can factor them into your budget, the more accurate it’s likely to be.
Once you have a decent sense of what your retirement expenses will be and how much income you’ll need, you then have to determine whether the resources you’ll have when you retire will be able to support your preferred retirement lifestyle. For help in making that evaluation, you can go to a tool like T. Rowe Price’s Retirement Income Calculator.
You plug in such information as your expenses; the value of the savings you’ve already accumulated; the amount, if any, you’re currently contributing to retirement accounts; how your savings are divvied up between stocks bonds and cash; the age at which you expect to retire and how many years you expect to live in retirement. (The calculator’s default assumption is that you’ll live to age 95, which I think is reasonable given today’s longer lifespans. But if you’d like to make your own estimate of how much time you may spend in retirement, the Actuaries Longevity Illustrator can help you make a more customized estimate.)
The calculator will then forecast the probability that withdrawals from your savings plus whatever income you’ll receive from Social Security and any pensions will be able to cover your retirement expenses for the rest of your life. T. Rowe’s calculator will automatically plug in an approximation your Social Security benefit based on your current salary and your planned retirement date, but you can get a projection of how much you’ll receive based on your actual work history by going to Social Security’s Retirement Estimator. (This tool will also show you that you may be able to boost your Social Security check by 7% to 8% or so for each year you postpone taking benefits between age 62 and 70. If you do choose to wait, you’ll likely have to draw more from your savings until you begin collecting Social Security, but for many people claiming later is the better move.)
Clearly, no tool can give you a guarantee of how long your resources are likely to fund the lifestyle you envision. There are two many unknowns: how the financial markets and the economy will perform; how inflation behaves; whether your estimate of retirement expenses turns out to be way off the mark. But by going through the process I described above, you should be able to come away with a ballpark estimate of whether you’re on track. And if you’re not, you can re-run the numbers to whether changes like saving more in the final years of your career, working a couple more years, cutting back on some of your discretionary spending in retirement or making other moves may be able to get you on a path to a more secure retirement.
If you’re not comfortable doing this sort of evaluation on your own—or you’d just like to have a pro take a look to see if his assessment agrees with your own—you can always hire an adviser to run the numbers for you.
But what you don’t want to do is leave this sort of retirement check-up until you’re on the verge of calling it a career or, worse yet, after you’ve already done so. Because if you do, you may find yourself in the unpleasant position of having to delay retirement at the last minute, downsize the retirement lifestyle you’d planned or perhaps even “unretire” so you can take another shot at retirement when you’re better prepared for it.