Retirement

When Can You Retire?

Determining when you can retire is a central consideration for most individuals that are preparing for, or approaching, retirement. There is no one-size-fits-all answer for when you can retire. Rather, your retirement age is influenced by a variety of factors, including the health of your retirement portfolio, the availability of any passive revenue streams, and whether you are fully vested in social security benefits.

A general rule of thumb is that you should expect to spend approximately 80% of your current income once you retire. However, this generalization fails to capture the complexity of estimating your expenses during retirement. There are many factors to consider, such as your lifestyle expectations, whether you are planning to travel, whether you are planning to downsize your home, and whether you can expect higher-than-average health care costs. The answers to these questions will be a key factor in determining when you can retire.

Retirement Success

Although there are many factors that can influence retirement success, one of the most common is a lack of equity exposure during retirement. Many retirees mistakenly believe that they must move their portfolio away from stocks once they have begun withdrawing for retirement. On the contrary, maintaining an appropriate global diversified allocation to stocks throughout retirement can be a significant determining factor in retirement savings and success.

A study conducted by the Financial Planners Association helps to illustrate the importance of maintaining equity exposure throughout retirement. This study analyzed the health of retirement portfolios based on the percentage of stocks versus bonds that each portfolio contained.

The study conducted by the Financial Planners association also demonstrates that portfolios that maintain equity exposure throughout retirement tend to fare better, despite the short-term volatility associated with stocks. Although volatility in the market represents some short-term risk, returns over a longer period of time stabilize.

A Successful Retirement Plan At-A-Glance

For many individuals, it is helpful to take a look at what a successful retirement savings plan looks like. This information can help retirees assess the health of their current retirement plans, and provide insight into strategies to improve their retirement plans over time.

In this example, the client is currently 54 years of age and plans to retire in 3 years. The client’s spouse is 44 but plans to quit working once the client retires. Their retirement plan consists of the following:

•   A combined retirement portfolio worth $900,000.
•   A home worth $725,000 with a recently refinanced mortgage totaling $350,000. The mortgage is expected to be paid off in 25 years.
•   A rental condo with no mortgage that generates $2,000 in revenue a month.
•   A pension will go into effect at the time of retirement, providing $6,000 per month. This amount from the pension will be adjusted yearly based on the COLA.
•   The client and spouse will delay filing for social security until they are 70, due to strong income throughout retirement.

Based on these facts, the client’s estimated withdrawal rate from their retirement account will be between 2-3%. This withdrawal rate will continue until both the client and spouse file for social security.

Retirement Savings

Saving for retirement is a crucial aspect of creating long-term financial stability. Many people fail to adequately prepare for retirement. This can create a period of financial hardship, particularly in the period of time directly following retirement. Given this, it is important to create a savings that is adequate to transition into retirement without losing your current quality of life. In general, you should be saving roughly 15-25% of your gross annual salary before heading into retirement. Of course, every person’s situation is different, so a customized retirement savings plan is almost always needed.

Emergency Fund

Simply put, everyone should have an emergency fund, whether you are close to retirement age or not. Emergency funds are funds a lump sum of savings that have been set aside to cover emergency situations. An adequate emergency fund allows you to navigate difficult periods without added financial stress. Emergency funds can cover unexpected expenses that pop up. These include things like car repairs, house repairs, unexpected health care costs not covered by insurance or loss of employment. Emergency funds give you the ability to cover your bills for a short period of time, creating breathing room and reducing any potential financial stress. In general, it is advised that you set aside enough money to cover 3 to 6 months of living costs.