How to know when you're ready for retirement.
How to know when you’re ready for retirement.
“By failing to prepare, you are preparing to fail.” So says Benjamin Franklin. And he is spot on about planning for retirement, even if that wasn’t what he was referring to. The question remains, what amount of preparation is sufficient in order to retire comfortably? Or rather, how much should I have saved to retire comfortably?
No easy answer
Answering these questions is never easy, especially given the fact that so many retirees live their lives so differently.
The percent of your current income that you expect to use in retirement is a key component in the equation to establish when you can retire. The younger the individual to whom this question is posed, the higher the likelihood my question is met with a blank stare. From years of asking the question, though, I can tell you that almost no one knows with certainty exactly what he or she will be spending in retirement.
Some people plan on retiring once their home is paid off, which means that the mortgage payment can be extracted from the retirement budget. Others plan on downsizing their housing in order to get a jump start with a little extra cash the day that they do retire.
Spending habits matter
For some people it is the time away from home that hits their wallets. Vacations cost quite a bit, and more of these tend to happen in the early years of retirement, so if an individual plans on taking trips, it may not be a bad idea to budget annually for the cost of these trips before assessing exactly how much is needed.
If you’re not working, you will likely be doing something with your newfound free time, but will that “something” cost you? Many folks don’t realize the extent to which they may be spendthrifts, and others may expect to spend much more in retirement only to pinch pennies and price shop their vegetables.
While you likely won’t be buying work clothes any more, do you expect to do more shopping overall in retirement? Maybe you should get that fancy Hello Kitty backpack you saw at Macys. You only live once, right? Shame be damned.
Then there’s your daily cup of coffee, which one recent report tallied up for the average American to nearly $1,100 a year. Will you keep drinking coffee in retirement? And your daily commute, again averaged at roughly $1,476 a year, likely won’t continue, though you’ll still be driving somewhere won’t you?
And don’t forget gifts! You always do, don’t you? Well, this could be a serious miscalculation on your part. I am a huge fan of hoodies, if you’re asking. Oh, and my birthday is mid-September.
Purse sense (or percents)
See what I did with that line above? While it’s notable that I am a funny guy, the fact remains that Certified Financial Planner™ Professionals are trained to meet the blank stare of the “plannee”, if you will, with a flat expectation of a need equivalent to 80 percent of an individual’s current income in retirement.
What comes out of your income during your working years but not in retirement leads us to this seemingly rational number. Most folks pay in to the Social Security system at a rate of 6.2 percent on their first $117,000, and an additional 1.45 percent tax comes out of the entirety of their income to fund Medicare.
In addition to these taxes, further reductions to income for working Americans often include their savings into their retirement plans. If financial planners like me have done our jobs, then most folks will be saving at least 10 percent of their incomes into retirement plans up through the day that they retire thus effectively reducing their take home pay by nearly 20 percent just in taxes and savings that often do not apply to the income you take from your retirement plans in retirement.
As if that weren’t enough
We didn’t even get to discuss the cost of healthcare as you age or the likelihood of Social Security becoming insolvent in just a few decades, or the risk that the markets pose to your cash, or the risk of a Japanese style deflationary spiral taking hold in developed economies like ours.
While there are many things to keep you up at night while considering retirement, don’t let me be one of them. Do your homework, find your team of professionals to guide you, and let people like us do the worrying for you.
Anthony M. Conte is Managing Partner at Conte Wealth Advisors with offices in Camp Hill, Pennsylvania and Fort Myers, Florida. He has a Master’s Degree in Financial Services and the CERTIFIED FINANCIAL PLANNER ™ certification, and he welcomes your emails: email@example.com
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Before acting on any financial advice, readers should consider whether it is suitable for their circumstance and consider seeking advice from a financial or investment adviser.