Can I Afford To Retire?
Can I Afford To Retire?
There was a recent Wall Street Journal article that talked ‘illusion of poverty’ and the ‘illusion of wealth.’ It asked whether you would rather have $1 Million or $5,000 of monthly income in retirement. The article made a great point that most Baby Boomers in or near retirement view $1 Million as enough money to retire on instead of looking at how much monthly income they can retire on. All too often we find ourselves looking at the big number that is in our 401k’s, 403b’s, IRA’s or any other retirement account without understanding how much income it will provide. What I am going to tell you is that number doesn’t mean anything if it can’t provide you the income you desire to have in retirement.
In this article we will talk about ways of figuring out if you can indeed retire based on the assets you have saved. You will need to first look at your spending habits and how much you want to spend as far as money in retirement and separate it by non-discretionary and discretionary. Next is to decide how much of it you want to be guaranteed and how much you are willing to have variable income. The next part is figuring out the tools to use to make sure that you can stay on your plan. Lastly, look at the ‘what if’ scenarios. If you take those steps, you will be able to get a good idea whether you can retire or not.
How Much Money Are You Spending?
First, let’s understand how much you are spending. Most Baby Boomers in retirement don’t understand if they can afford to retire because they do not even know how much they are spending each month. Most of you don’t even have a… (Dirty word) budget! That’s OK! You don’t need a budget… yet, unless you are spending more than you can afford. Take a look at your spending habits, and it is easy to do. Pull out your bank statements and look at each month on the bottom you will find the total debits. Add each month for 12 months and divide by 12 and you will get your monthly spending habits. If you can’t believe it how much your spending, look at your last 24 months and divide by 24. You will get a more accurate picture. It may be surprising!
Look At Your Spending Habits
Next, look at the spending habits and determine of the expenses, which is non-discretionary and what is discretionary. Non-discretionary are things like food, water, utilities, and a roof over your head. Then look at your discretionary expenses, such as eating out, travel, buying gifts, etc. Now you have a good idea of your expenses, figure out how much you want of your expenses you want to be covered by guaranteed income. What is guaranteed income? Social Security, Pensions, and dare I say it… annuities. These are the only games in town that will provide guaranteed income, and for most Baby Boomers, they would like their non-discretionary income covered by guaranteed income to give them some lifestyle and more importantly, peace of mind. The rest of the income can be variable if you would like, such as income from tools like stocks, bonds, and exchange traded funds.
Safe Withdrawal Rate
From the funds you have, you will have to determine what a safe withdrawal rate may be. Some say it is 4%, others say 3% or 5%. There is no exact answer because everyone has a different situation between health and longevity. If you have a $1 Million, and you consider 4%, that is $40,000 a year or $3,333 a month. This is where the illusion of wealth vs. illusion of poverty comes from. You might have thought that $1 Million would give you a lot more income per month. If you have $1 Million in an annuity and you are around age 65, the average income you would receive is around $5,000 a month. It all depends on the annuity as well. When you look at your spending habits, how much of a percentage would you need to withdrawal to maintain your lifestyle? If the percentage is too high, or higher than you would like, then it may be harder to afford retirement at this time unless you change your spending habits.
What If Scenarios
Lastly, look at the ‘what if’ scenarios and decide for yourself if your money will make it in each different scenario. For example, you will need to know what happens if one spouse passes away, look to see if there enough for your spouse to live on with what is left over. Maybe you have a Long Term Care concern or concerned you might live a long time. By thinking of the ‘what if’ scenarios and understanding ‘Plan B’ will give the best chance of success in retirement.
Instead of having the ‘illusion of wealth’ or the ‘illusion of poverty’, you will now have more of a concrete idea of what your retirement will look like and based on the numbers help you decide whether or not you can afford to retire. You can see that it really doesn’t matter how much you saved, whether it be a large or small number, it matters how much income it will provide you in retirement and how much of that will cover your spending habits. If you are comfortable with the numbers, and the ‘what if’ scenarios, then you are getting closer to saying –“I can afford to retire.”
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