If you’re thinking of retirement, specifically when you can retire, you need to ask the right question. Too many people ask the wrong questions. They often ask, “At what age can/should I retire?” Or, “I hate work and it’s damaging my health. Can I retire?” There’s also the ever popular, “I’ve put in thirty years so I get to retire now, right?” None of these are the right question. The question you need to answer is, “What is my retirement number?” Once you know the number, you can determine at what age, frustration level, time served, etc. that you can retire.
Too many people approach the retirement question as if retirement is a specific age, a want, an entitlement, a health consideration, or an emotional feeling. It isn’t any of that, at least not primarily. Retirement is a number. Nothing more, nothing less. Only once you have the number can you work your way through the questions of whether or not you’re emotionally ready, or if you feel like you’ve achieved your goals, or reached the point in life where you want to do something else. All of that stuff is secondary to the number.
Why? Because if you haven’t achieved your retirement number, you can’t afford to retire. No matter your health or desires, if you don’t have the money saved to meet your expenses, you can’t afford to retire. You may be able to switch jobs and find something you like more or which stresses you less, but you can’t quit working until you hit that number. You can retire young if you have your number, but if you don’t have your number, you cannot retire, even if you’re old or ill. This sounds harsh, but there’s no other way around it.
So what is the magic retirement number? It’s a simple calculation. First, you need to figure out your likely expenses in retirement. There are plenty of expense tracking programs on the market, or you can use pen and paper or your own spreadsheet. Use something, and use it religiously. Record everything you spend money on over several years. Be honest and don’t fudge! That will give you a true picture of what you spend and account for the infrequent expenses like home repairs and car purchases.
If you plan to reduce expenses in retirement, subtract those items from your number. Will your home be paid off, for example, or will you use less fuel to commute to work? Will expenses go down when the kids leave home? Are your taxes likely to be higher or lower? Do you plan to increase spending on travel, hobbies, or healthcare? Will you self-insure for long term care if you need it, or pay LTC premiums? Do you want a buffer for black swan events? Adjust your projections accordingly.
You can’t know your expenses with 100% accuracy because things happen. Unexpected illnesses, events, and repairs can throw a wrench into even carefully planned budgets. Having several years of expense tracking behind you can give you a pretty solid base from which to project, however. Also, the more honest you are with yourself about what you’ll spend in retirement, the better your projections will be. So do the research. Research health care and travel expenses. Model your tax situation. Don’t guess about these things.
Next figure out how much you have saved across all accounts, and any other income sources you’ll have. Include real estate only if you intend to sell it to finance your retirement, or if it will provide rental income. You can include Social Security, disability, and pensions if you’ll receive them, or leave them out and only count them as a bonus if you want to be conservative. (Don’t count expected inheritances, though. Too much can go wrong before you see any of the money.) If you intend to work part-time, you can figure that in, but be honest about the type/amount of work and likely wages. Wishful thinking that you’ll run a million dollar business from the beach isn’t helpful.
There are calculators and spreadsheet templates all over the internet that will allow you to model your saving’s growth and projected income over any number of years, market conditions, and inflation scenarios. Play around with both conservative and bullish projections to get a sense of the possibilities. If you want to err on the side of caution, stick with the conservative estimates for planning purposes.
Once you know your expenses and savings, the last piece is to figure out how long you’ll need the money to last. You’ll never know exactly how long you’ll live and need your savings to last, but you can model different scenarios. If you know people in your family die young or from incurable diseases, you might project a shorter life expectancy. If people live to over 100 in your family, plan for the long haul. Play around with different retirement ages and life expectancies to see how your models change.
Now you know your expenses, how much you have saved, and how many years(ish) you need that money to last. From here, it’s just math. Some people swear by the 4% rule. This says that you can withdraw 4% per year (adjusted for inflation) from your portfolio without running out of money over a thirty year retirement. If your retirement is likely to be longer than thirty years, 4% might be too aggressive. Others choose higher or lower percentages based on their risk tolerance and amount saved. You can play around with the percentages to see what sort of income you can expect from your portfolio.
If you’re math averse, there are plenty of online calculators that can do the math for you, and spreadsheet templates if you want to DIY. However you do it, make sure you’re crafting an accurate model. Account for taxes and inflation. Base your expenses off of years of data, not months. Model your savings during down markets, up markets, and sideways markets. Yes, it’s a lot of work. However, it’s the only way to know your number. You can’t hand wave the number into existence, or base your number on a month’s worth of data and say, “Well, this feels right.” You have to know. (Or at least know as much as you can given the uncertainties of life.)
Knowing your number is the key to removing most of the fear from retirement. When you know your number, you realize that you are likely safe from most of the worst case scenarios. Then you can devote mental energy to answering the other nebulous questions such as, “Am I mentally ready to quit?” and, “What will I do with my time?”
The bottom line is that no matter how much you want to retire, or believe you’re entitled to retire, retirement isn’t a given unless you hit your number. Hit that number and the world is yours.