After years of hard work, you're certainly entitled to a happy retirement. You may have already started daydreaming about it, at least a little. Will you travel the world, volunteer for your favorite charity, go fishing, or spend more time with the grandkids? The possibilities are endless.
Even so, many workers are a little afraid of retirement. They've heard too many horror stories about people who retire too soon and find their income and lifestyle severely restricted. According to the 20th Annual Transamerica Retirement Survey of Workers, published in 2020, outliving savings and investments is the most frequently cited retirement fear among American workers—40% said this is their top concern. Add to that the economic fallout from the ongoing COVID-19 pandemic, which has added another layer of complexity for many aspiring retirees.
So how do you know when the timing is right? Here are six signs that indicate you're ready to retire if you want to.
- Before you retire, make sure your income will support the lifestyle you want.
- Consider postponing retirement if you have family financial obligations or substantial outstanding debts.
- Make sure your portfolio is updated.
- If you have a spouse or other partner, the two of you should coordinate your retirement plans.
1. You've Hit Full Retirement Age
If you were born between 1943 and 1954, your full retirement age for Social Security purposes is 66. If you're born after 1959, you’ll have to wait until you’re 67. Between those dates, it's 66 and some months. Although you can start claiming Social Security benefits as early as 62, your benefits will be much higher if you wait until full retirement age. If you start your retirement benefits at 62, your monthly payment is reduced by a whopping 25%.
On the other hand, if you wait even longer to claim Social Security—the maximum age of delay is 70—you'll receive as much as 132% of the monthly benefit you would have collected at your full retirement age.
If you start collecting Social Security early, it will also lower any survivor benefits your spouse is entitled to after you pass. If your spouse outlives you for many years, this could be a serious financial hit.
2. You're Debt-Free
If you've paid off all your debts, you are well-positioned for retirement. If you have credit card debt or still owe a lot of money on a home or car, you may want to postpone giving yourself over fully to your days of freedom.
When you’re on a fixed income, a hefty mortgage or car payment can put a major strain on your finances. It also makes it more difficult to deal with unexpected expenses. Before you hand in your retirement notice, try to whittle down most, if not all, of your outstanding debts.
3. You're No Longer Supporting Kids or Parents
Are your kids all grown up, out of the house, and earning their own income? That makes it a lot easier for you to retire.
However, if you're still supporting your kids or helping them out regularly, you may want to put your retirement plans on hold for a while. You might also hold on if you have elderly parents who need your financial support—or may need it down the line.
"Supporting aging parents or kids at home is becoming more expensive as college and housing costs continue to rise. There is no way a couple can downsize and start minimizing their expenses if they have a household to take care of," says Carlos Dias Jr., founder and managing partner of Dias Wealth LLC in Lake Mary, Fla.
4. You've Created a Retirement Budget
This may seem like a no-brainer, but many soon-to-be retirees don't crunch the numbers. Before you ditch your career, it's important to figure out whether you can live comfortably on your post-retirement income.
Start by adding up your must-have monthly costs, including mortgage or rent, groceries, electricity, and other utilities. Then add in your "wants," such as travel, entertainment, shopping, and dining out. Once you’ve calculated your estimated monthly expenses, it's time to figure out whether you'll have enough income to cover them. Add up your estimated Social Security benefits, retirement account distributions, pension payments (if you get them), and any other sources of income you will have. Remember that you will owe income taxes on all distributions except Roth IRAs, Roth 401(k)s, and a portion of Social Security (unless you meet the income threshold for tax-free Social Security benefits.)
A common rule of thumb used by many financial planners when planning for retirement is to strive to replace 70% to 80% of your pre-retirement income. It's also important to factor in inflation when budgeting, which is also known as the Consumer Price Index (CPi). The days of paying 25 cents for a loaf of bread are long gone. While annual inflation has been relatively modest over recent years, roughly 2 to 2.5%, there's no guarantee we won't see higher levels in the future. The CPI was 7.5%, as of January 2022. Moreover, some rates of inflation for things such as medical expenses can be significantly higher. Factoring in expenses for healthcare during retirement is an often overlooked aspect of one's retirement budget. Luckily, Social Security currently offers cost-of-living adjustments (COLA), but many pension plans do not and your goal for retirement plan savings is to consistently earn enough to more than account for inflation.
Once you figure out your retirement budget, now comes the time to estimate how much income you will have to cover those expenses. As mentioned earlier, your sources of income will typically include retirement savings, Social Security, and pension payments, if you're lucky enough to have one. Another key rule of thumb when determining how much income you will have in retirement: "Your retirement budget, if you retire in your mid-60s, should not exceed 4% of your investments plus Social Security and pension payments," says Kristi Sullivan, CFP®, of Sullivan Financial Planning LLC in Denver, CO.
Do you have enough to cover your monthly expenses, including at least some of those wants? If so, you might be ready to retire.
How Much Should I Save for Retirement?
The percent of American workers whose confidence in their ability to retire comfortably has decreased due to the COVID-19 pandemic, according to Transamerica's retirement survey.
5. Your Portfolio Is Updated
How long has it been since you took a hard look at your investment portfolio?
"There are three parameters that influence one’s ability to live off one’s savings at the onset of retirement: First, the size of the savings or investment portfolio upon retiring; second, the expected growth rate of the portfolio going forward (the average annual return), and third, the amount of annual withdrawal/consumption the retiree is going to require to maintain this/her lifestyle (or not)," says Jeff de Valdivia, CFA, CFP®, of Fleurus Investment Advisory LLC in Fairfield, Conn.
If you haven't done a portfolio checkup in a while, now is the time to do one. If your portfolio has taken a major hit in recent years, your nest egg may not be as large as you thought. And the longer-term consequences of the COVID-19 pandemic on retirement security have yet to play out.
As you near retirement, you may also want to shift to a more conservative investment strategy to protect your retirement wealth.
It may be useful to sit down with a financial advisor as you carefully reassess your portfolio and figure out whether you need to make adjustments.
6. Your Spouse Agrees
Unless you live alone, retirement doesn’t affect just you. Retirement is a decision for you and your partner to make together.
One factor to discuss is how the reduction in your income will affect your partner. If you and your spouse are both financially and emotionally ready for it, you’ll be more likely to enjoy a fulfilling retirement together. If your spouse intends to continue working for many years, your retirement may be much lonelier than you expected. On the other hand, retiring at exactly the same time if both partners have jobs can be both a financial and a psychological shock. Work out the best timing for each of you and both of you.
"Communication is always important, especially when it comes to your household finances. Being on the same page in terms of your retirement plan will help bring you peace of mind about transitioning into your next phase in life," says Mark Hebner, founder, and president of Index Fund Advisors Inc., in Irvine, CA.
The Bottom Line
Retiring too early can be a mistake that leads to you not enjoying retirement to its fullest—especially if you're forced to re-enter the workforce by financial necessity instead of your own choice. Take the time to plan carefully so that you make the right decision on when to retire.