You may have your heart set on leaving the workforce at 65, but do you have the money to support yourself? Here's how to find out.
Question: My husband and I will retire next year when we’re 65. How do we find out how much we’ll need to live on and how much we can count on from our Social Security, pensions and other assets? —T. E., Fontana, Wisconsin
Answer: I don’t want to put a damper on anyone’s retirement vision. But as I read your question, I couldn’t help but feel that you’re going about this backwards.
You seem to start from the premise that you’ll retire when you turn 65 next year. But I don’t see how can you be so certain that you’ll retire at 65 - or any age, for that matter - if you haven’t first figured out how much you’ll need to live on and don’t know whether you’ll be able to generate enough income to support yourself throughout a retirement than can easily last 25 or more years.
I mean, it’s not as if we get a comfortable and secure retirement just because we reach a certain age. The real issue in determining when you can retire is whether you’ve got enough in savings and other resources so you can leave your job yet still live the lifestyle you want, or at least one that’s acceptable to you.
What’s more, this sort of assessment isn’t something that you should be leaving to the eve of your expected retirement date. You should ideally keep tabs over the course of your career on your progress toward a comfortable retirement. And at the very least once you hit the home stretch - that is, when you’re within 10 or so years of when you hope to retire - you should be doing a fairly rigorous analysis every year or so to confirm whether you’re still on track to achieve your target retirement date and, if not, re-assess your plan.
So getting back to your situation, I think that you and your husband need to ask yourselves a slightly different version of the question you posed to me - namely, based on how much you’ll receive from Social Security, pensions and what you can reasonably draw from your savings and other resources, can you actually afford to retire at 65?
Or, to put it another way, if you do go ahead and retire at 65, will you be able to live as comfortably as you would like - or might you be better off postponing retirement a bit?
To answer those questions, the first thing you’ve got to do is create a retirement budget that includes everything from essentials like food, utilities and housing costs to the nonessentials that make life more enjoyable, such as travel and entertainment.
And don’t forget that you’ll undoubtedly run into unexpected expenses - medical bills that aren’t covered by Medicare, a roof that needs fixing or a car that’s got to be replaced - and that your living costs are likely to rise along with inflation over the years.
Next, move on to the income side. There, you want to start with what you’ll get from Social Security. You can do that by contacting your local Social Security office or by going to Social Security’s new benefit estimator. Unlike previous benefit calculators available on the Social Security site, this one takes your actual past wages into account when calculating your expected benefit, thus giving you a more accurate estimate of what you can expect.
As for company pensions, your respective HR departments should be able to give you the skinny on what you and your husband qualify for and what options you have for collecting it.
If you find that Social Security and pensions alone are enough to cover your retirement expenses - plus enough of a cushion to allow for unanticipated expenses and inflation - congratulations. You’re financially ready for retirement.
But I’d be surprised if Social Security and pensions alone will provide sufficient income. Most people also have to dip into savings to bridge the gap between what Social Security and pensions, if any, provide and what’s needed to cover retirement expenses. At that point, the issue comes down to how much you can reasonably draw from your nest egg each year to close that gap. Generally, to avoid going through your savings too soon you’ll want to limit your initial draw to about 4% of your savings and then increase that dollar amount for inflation each year (although, this 4% rule is a guideline, not a carved-in-stone commandment).
If the combination of Social Security, pensions and prudent draws from your savings is enough to cover the expenses on your retirement budget, then you’re pretty much home free. Let your retirement adventures begin!
If not, then you’ve got to consider other options. Maybe you can still retire on schedule by dialing back your lifestyle a bit. Or you might be able to generate more income by working part-time in retirement or tapping your home equity by trading down or taking out a reverse mortgage. Then again, you might consider postponing retirement a couple of years to give your retirement savings a chance to grow.
Of course, this sort of analysis requires a bit of number crunching, which is best done with retirement-planning software or an online calculator like Fidelity’s Retirement Income Planner. Or you can have a financial planner who specializes in retirement planning run the numbers for you.
The point, though, is that you want to do all this well in advance of retiring. If you wait until you’re on the verge of your hoped-for retirement date and find that you’re not really prepared to retire, you’ll have a tougher time improving your situation than if you had started earlier.
So I suggest that you and your hubby go through the process I’ve described above either on your own or with a planner. When you do, I hope you find that you’re able to retire at 65 as you wish. If that’s not the case, then at least you can start making plans now for a more realistic retirement date.