“Change is a constant.” —a very wise person
Before deciding to retire, it’s important to ask yourself if you are ready both financially and emotionally. Whether you are ready emotionally can be determined by answering one question: Am I ready to make a lifestyle change that allows me to stop working?
If the answer is yes, there are several more complex questions to help determine if you are financially ready to retire. (Regardless of your current age, it’s never too early to answer these questions to get you thinking about retirement.)
Question 1: Do I know how much annual income I will need in retirement?
If you do not have an answer for this, develop a “basics” budget. I cannot stress enough the importance of projecting out your expenses in retirement, especially for necessities. Now replace the word “want” with “need.” Create a dream budget. Would you like to travel? Buy a fancy car or second home? Plan to fulfill your desires.
One of the biggest misconceptions about retirement planning is that you need only 60-80% of your pre-retirement income once you have retired. That rule may work as a general target when you begin your savings; however, as you near retirement the actual amount will become clearer.
Question 2: What are my fixed sources of income and how much will they provide?
Once you have arrived at the answer to the first question, make sure your fixed and variable sources will provide sufficient income to meet your needs. (Think Social Security and pensions, if any.) For example, if you need $80,000 per year in retirement and your fixed sources provide half that amount, will your investment portfolio sustainably provide an additional $40,000 per year? If not, your plan may need to be adjusted.
The answers to questions 3-7 will further help answer question 2.
Question 3: How much do I have saved in retirement and/or taxable accounts (e.g., IRA, 401(k), brokerage)?
Question 4: How much sustainable income can I withdraw from those accounts?
Question 5: How much of my savings is in post-tax accounts versus pre-tax accounts?
Question 6: Am I comfortable with the level of risk inherent with my accounts?
Question 7: How would my accounts react in a bear market scenario, and would I stick with my plan if the market dropped? If your answer to the latter question is no, it’s time to reassess your portfolio.
Once you are confident you have enough assets saved to retire, including enough income to support your spending, it’s time to dial in the specifics. When and how to file for Social Security, how to manage withdrawals in the most tax-efficient manner, how to execute charitable aspirations in a way that also provides the best tax benefits, and how to position your portfolio for consistent income.