Looking forward to retirement is something that many of us get excited about. We anticipate spending more time with family and on our hobbies, volunteering, or even traveling the world. Even still, in today’s environment, being financially prepared for retirement and feeling ready to retire are two separate things. So, whether you’re early on in your career or nearing retirement, there are actions you can take and questions to consider to determine whether you will have the funds saved up to fuel your retirement.

Factors to consider

It may feel like a daunting task to assess your financial readiness for retirement and all the subsequent questions you must answer. Plus, if you are married or have a long-term partner, you’ll want to consider the following factors together to ensure that you have similar views about your lives as retirees, and can plan for both your needs accordingly.

It’s never too early to get started on retirement planning, especially when it comes to financial readiness. So, taking the time to assess these considerations and be honest about your spending habits, desired lifestyle, and saving patterns will help you decide whether you’re financially ready for retirement and able to make this major life change.  

When do you want to retire?

Each person has different career and retirement goals, so their choice of when they’d like to retire will vary accordingly. Taking into account both personal and financial considerations, like where you will want to reside and when you will begin to collect Social Security benefits, among other factors, you can determine the age to retire that’s best for you. With the help of a financial advisor or planner, you can make clear savings goals and see what the road map would look like to retire on your desired timeline.

Right now, the average American retires at age 62. For some, working well into their 60s and 70s is how they envision their career, while others are ready for retirement much earlier. Regardless of when people want to retire, it is advisable to do the proper planning ahead of time to ensure that your desired age for retirement is financially feasible.

Deciding when you want to retire is a crucial decision because the age when you quit working paired with how long you expect to live will give you a good idea of the length of your retirement. From there, you can estimate how much money you will need saved up to endure your lifestyle during those years.

This also has implications for your saving patterns. As one could assume, someone wanting to retire at a younger age will likely need to save larger portions of their paychecks each month compared to someone who wants to work until they are 70, and thus can save over a longer time frame.

In addition, those retiring earlier might want to consider taking smaller withdrawals from their retirement accounts and possibly delay claiming Social Security. Someone retiring at 65 might have to plan for 20 to 30 years of income, while someone retiring at 55 might need up to 40 years of income. Making these decisions and having these conversations sooner rather than later will only benefit you, as you can make the corresponding saving and lifestyle changes to reach your retirement timeline goals more easily.

How much do you need to retire confidently?

Getting down to the actual dollar amount that you will need to have saved before retiring is an important step during retirement planning. Of course, everyone’s needs will differ, so it’s important to do the following calculations with your own life and financials in mind.

A simple way to guess how much we need for retirement is to multiply our current annual expenses by 25. That is the average number of years spent in retirement–imagine someone retiring at 65 and living until they’re 90–therefore it will give you a good idea of the total amount of expenses you’ll have as a retiree. Following the 4% withdrawal rate rule, you can ensure you’ll have enough in your retirement portfolio to cover your expenses each year.

However, if you want to retire earlier, let’s say at 55 years of age instead of 65, retirement would last 35 years. So assuming you spend $100,000 annually, you would need $3.5 million saved up to cover your expenses. Since your retirement portfolio needs to cover your costs over a longer time frame, you might only want to take a 3% withdrawal rate instead of 4%. In this case, that would provide $105,000 per year to cover your expenses.

What lifestyle will you lead?

As mentioned above, everyone has different spending habits and lifestyles. Accurately assessing the kind of life you want to lead during retirement–and how much that will differ from the life you currently have–can help determine when you will be financially ready for retirement with the savings you have accrued throughout your career.

For example, those who want to retire locally could have a much lower retirement price tag than the retiree who plans on traveling and taking kids and grandkids on vacation each year. Do you want to be able to buy a new car during retirement? How about buying a new home in a warmer climate? These are all questions that you need to ask yourself ahead of time so you understand how much you will need to save up to lead the lifestyle during retirement that you have envisioned for yourself.

At any stage in your life, it’s important to create a budget that can help guide your purchasing decisions and balance your needs and wants. This couldn’t be any more true than during retirement. Living off of a fixed income doesn’t have to be limiting, especially if you plan ahead for the lifestyle you want. However, you should still be aware of how much you can reasonably spend each month to stay financially secure throughout your entire retirement.

What sources of income do you have?

Many workers get ready for retirement by making regular contributions to a 401(k) or IRA account throughout their careers. Once retiring, the distributions they take from these accounts each month act as their income. Though these are some of the more common accounts utilized for retirement savings, be aware that there are plenty of other vehicles that individuals may use to save up for retirement.

Regardless of the type of retirement account you have, it will probably make up a sizable portion of your income during retirement in addition to Social Security benefits, which we will discuss in more detail below. The main implication that comes from the type of retirement account you have has to do with your tax burden as a retiree.

For funds in a Traditional IRA or 401(k), all distributions will be taxed as income during your retirement, while distributions from a Roth IRA or Roth 401(k) are not. Since contributions to Roth accounts are not tax-deductible when they are made, account holders can enjoy non-taxable distributions during retirement. These are distinct differences, so you should be aware of which type of account you are contributing to, how that will impact your tax bill once you’ve retired, and thus the net income that you will receive to fuel your retirement.

When will you claim Social Security?

An additional question that you will need to answer once approaching retirement is when you should begin to take Social Security benefits. While many today do not fully rely on Social Security to fund their retirement, it is still a source of additional income that you are entitled to receive, so it’s worthwhile to plan it out accordingly.

Though you can begin claiming Social Security at 62, being able to receive “full benefits” is determined by your full retirement age, which depends on the year you were born, and whether you’re exceeding the yearly earnings limit. For example, someone born in 1956 reaches full retirement at 66 years and 4 months, while those born after 1960 reach full retirement age at 67. Choosing to receive Social Security before you’ve reached this age can result in a reduction in benefits of up to 30%. On the other hand, if you wait to take benefits between your full retirement age and 70, you are rewarded and paid over the full amount of benefits you’re entitled to each month.

In addition, there is a yearly earnings cap in place, which is $19,560 in 2022 for those who are below the full retirement age but receiving Social Security benefits. So, for every $2 you make above the annual limit, your benefit payments will be reduced by $1. This changes in the year you reach full retirement age, with a different earnings limit of $51,960 in 2022, and $1 deducted for every $3 earned above this level. After that, there is no earnings cap on your income once you’ve reached your full retirement age.

How long will your money last?

One of the most crucial factors for all retirees is calculating how long their nest egg will be able to sustain them during retirement. Retiring too early is always a risk if people haven’t taken the time to assess their savings, how much they intend to spend each month, and how long they expect to live. Outliving savings is a major fear, with 40% of American workers noting this as the biggest concern they have about retiring.

Though there are some rules of thumb by experts who say you should be setting aside 15% of your pre-tax income each year for retirement and following the 4% withdrawal rate rule, taking the above aspects into consideration like your current age, how early you want to retire, and what type of lifestyle you want, your saving habits may need to adjust to endure throughout your retirement.

In sum, considering the above factors and accurately assessing your desired lifestyle as a retiree and where your retirement portfolio currently stands, you can have a better idea of when you will be financially ready to retire. Of course, there will always be factors outside of those mentioned here that may impact your timeline to retire. For example, it was recently reported that one-third of Americans will be retiring later due to the effects of the pandemic.

The good news is that there are professionals like financial planners and advisors who are eager to help you answer these questions, make smarter financial decisions, and keep you headed in the right direction when it comes to saving up for your retirement. To learn more, register for our webinar, Maxing Your Social Security Benefits, later this month.