Retirement is more than just numbers. You need to look at all the puzzle pieces before you can put them together, says Money Magazine's Walter Updegrave.
Question: I'm 55 years old and would like to retire at 60. I’ve got $30,000 in a money market account and $170,000 in my 401(k). I’ll have a pension of $1,500 a month and I’ll collect Social Security of about $1,800. Do I have enough to retire at 60? --Liz, Los Angeles, Calif.
Trying to figure out whether you can afford to retire - at 60 or any other age, for that matter - is essentially a process of putting together pieces of a financial jigsaw puzzle.
Some of the puzzle pieces are the income you’ll collect in retirement - your $1,500-a-month pension and your $1,800 monthly Social Security check. Others are the assets from which you can draw income - the $30,000 you have in a money-market account, the $170,000 in your 401(k) and whatever growth you’ll have in those accounts from additional savings plus investment earnings over the next five years.
The idea is to assemble the various pieces and then see whether a picture of retirement life emerges - that is, one that reflects a post-career standard of living that’s acceptable to you.
Problem is, it’s virtually impossible to develop even the fuzziest image of retirement life in your case because you have left out several major pieces of the puzzle.
Figure your expenses
You give no indication, for example, of the various expenses you will incur in retirement. Without having a decent handle on how much money will be going out on a regular basis, it’s virtually impossible to say whether the money coming in from your pension, Social Security and reasonable withdrawals from your savings will be sufficient to support you comfortably after you stop working.
A particular concern for someone in your position is health care. If you retire at 60, you will have to wait five years until you qualify for Medicare. If you’re fortunate enough to have retiree health coverage from your employer - which is less frequently the case for most workers - then maybe this is a minor piece of the puzzle that won’t materially affect your ability to retire soon.
But if you’re going to have to provide that coverage on your own, then you’ll need to factor the cost of private medical insurance into your budget for at least the early stages of retirement. As you can see by perusing the price of policies at this site, that expense alone could be enough to determine whether you can actually afford an early exit from the workforce.
Look at how you're invested
And even some of the puzzle pieces that you have mentioned need to be refined more if you want more than just a vague sense of whether you’re prepared. Take your 401(k). It’s not just the size of your account that matters, but how it’s invested. Are you hunkered down mostly in cash and fixed-income securities? Are you taking a flier on high-octane stock mutual funds? Or do you have your money spread among a diversified lineup of both stock and bond funds? The answer can have a significant impact on how much income you can expect to draw from your retirement savings, and how long those savings might last.
All of which is to say, based on what you’ve told me, nobody can give you an accurate sense of how viable an option retiring at 60 is for you.
Fortunately, there are two ways you can quickly bring your retirement prospects into sharper focus.
One is to plug all your pertinent financial information - pensions, Social Security, retirement investment accounts, your anticipated retirement expenses - into a decent online calculator, such as Fidelity’s Retirement Income Planner, that can crunch all the numbers and assess your odds of being able to retire on the schedule you envision. (You don’t have to be a Fidelity customer to use this tool, although non-customers do have to register at the site.)
The other way to do this is to hire a financial adviser to do the analysis for you. If you take this route, however, be careful to avoid glorified sales people and outright scamsters posing as advisers.
Crunch the numbers
Whichever way you decide to go, I recommend you run multiple scenarios to see how your retirement prospects decline or improve as you vary your assumptions. For example, it could very well be that delaying retirement just a year or two could fatten your nest egg enough to give you a much more comfortable lifestyle and reduce your odds of running out of money.
You might also want to try varying the date at which you’ll start receiving Social Security. You can begin collecting as early as age 62. But holding off can boost your payments by as much as 8% a year. Or you can figure out how your payment might vary at different ages, with an online calculator.
Of course, postponing Social Security will mean drawing more money from your savings while you’re waiting to collect. But this decision can work in your favor if you live to life expectancy or beyond.
You’ll also want to factor in other possible income sources, such as a reverse mortgage and working in retirement. You may not need to rely on these options, but it’s a good idea to see what sort of cushion they might provide.
Finally, if you are serious about retiring at 60, you should definitely begin considering you’ll actually live in retirement. I mean think about how you’ll fill the hours of your days once work isn’t dominating your schedule. Neglect this sort of “lifestyle planning” and your retirement may be a financial success but not emotionally fulfilling.
But it’s all got to begin with an assessment of all the pieces of the retirement-planning puzzle, not just a few. So either start evaluating the big picture on your own along the lines I’ve recommended, or find someone who can help you bring it into clearer focus.
Got a question? Ask the expert.