A 2019 research study from Northwestern Mutual reported that, on average, people think there is a 45% chance they will outlive their savings. In addition that same study found that 22% of adults in the U.S. have less than $5,000 saved for retirement, while another 15% have no retirement savings at all.
With statistics like these, it's no surprise that the most common question I get from clients is, "When can I retire?" The answer, as with most things in the world of financial planning, is "it depends." Finding the right time to retire depends on your work benefits, your health, your retirement goals and a number of other factors. While there is no one size fits all approach when it comes to retirement planning, there are some general guidelines that I will cover in this blog post.
Hopefully, this framework can give you a good place to start answering the question "When Can I Retire?".
Step One: Set a Retirement Goal
What type of lifestyle do you want to live in retirement? Are you planning on traveling the world? Are you planning on downsizing or moving to a lower cost of living city? Are you planning to stay put and maintain your lifestyle? These are important questions to ponder when setting a retirement goal.
From our experience, replacing 80% of your income when your retire is the approximate equivalent to maintaining your current lifestyle. So, if you want to stay put in retirement, you can set a goal of replacing 80% of your income. If you are planning on living a luxurious retirement and travelling, you can set a goal of replacing 100% of your income. If you want to downsize or move to a cheaper area, you can set a goal of replacing 60% of your income. Regardless of your desired lifestyle, taking the first step of setting a goal can greatly increase your chances of achieving it.
Step Two: Build Fixed Income
Fixed income will be the foundation of your financial plan.
Fixed income are sources of income (typically monthly) that you cannot outlive. Fixed income will essentially replace the income checks that you used to receive when you were working. Some of the most common types of fixed income include:
Social Security - Most private sector employees pay into Social Security and will receive a monthly retirement benefit. Visit The Social Security Website to download your most recent statement and see estimates of your benefit.
Pensions -Some private sector and most public sector employees pay into a private, state, or federal pension system. When you retire, your pension will pay you a fixed benefit for the rest of your life. The amount is typically calculated from an equation that depends on your years of service, age at retirement, and income. Some common pensions include CalSTRS, CalPERS, LACERA, LACERS, & FERS.
Rental Properties - One great way to develop fixed income is through rental property ownership. Essentially, the rent that you charge your renters becomes your fixed income. Another benefit of owning a rental property is that the property value itself can appreciate and act as an investment while you are receiving income. Some downsides include the illiquidity of real estate and the work it takes to maintain renters.
Annuities - Another great way to generate fixed income is to purchase an annuity from an insurance company. When you do this, you typically sacrifice some of the growth potential on your money, but the insurance company is able to guarantee* a certain level of income for the rest of your life. Often, private sector employees without a pension will use an annuity as a "personal pension." *The guarantee is based on the claims paying ability of the issuing firm.
In general, the more fixed income you can build, the better. If you are able to fully fund your retirement goal with fixed income, you are in good shape but this isn't always possible. When fixed income isn't enough, you will need to take money out of your supplemental retirement accounts.
Step Three: Build Your Supplemental Retirement Accounts
Whether you are able to build up significant fixed income or not, it is important to also build your supplemental retirement savings. Some of the most common account types include 401(k)'s, 403(b)'s, 457(b)'s, IRA's, and Roth IRA's. These vehicles provide a home for your long term retirement investments and also provide some key tax benefits. Your supplemental retirement accounts are also important because they will be your main source of liquidity (or quick access to money) in retirement. If you have any unexpected expenses, medical emergencies, or need long term care, these accounts can be liquidated to cover large expenses.
One challenging step in retirement planning is determining how much you will need to have in your supplemental retirement accounts to comfortably retire. Our team has financial planning tools and calculators available to help you come up with a goal, so let us know if you need assistance!
In general, the more fixed income you build in preparation for retirement, the less you will have to save in your supplemental retirement accounts. However, if you have less fixed income, you will be more dependent on your supplemental retirement accounts and will have to save more into those accounts.
Step Four: Create Your Retirement Plan
While these these steps should point you in the right direction when it comes to retirement planning, there is no substitute for putting together an official retirement plan with your financial advisor. We have access to state of the art technology to help you put together a plan and track your probability of success. To begin the process of putting together your financial plan, schedule an initial consultation with me. I am a Certified Financial Planner® which is the highest designation a financial advisor can receive when it comes to financial planning.
We look forward to being a continued resource for you!
Best Regards,
Alex