When Can You Retire? Maybe now.

Dana Anspach

July 1, 2021

It may be hard to believe, but not everyone wants to retire. However, for those who do, the most common question is, “How quickly can I make retirement happen?” Once you’re ready to retire, it seems the last day of work can’t come soon enough.

We’ve worked with many folks who even keep a retirement countdown app on their phone, and they avidly show us how many days and even hours they have remaining. How do they know they can retire and why are they so certain that date will work? Because they’ve done the calculations. Or, at least had someone do the math for them. They planned ahead. Both financially and psychologically. Here’s an overview of how this planning works.

Happy Retirees Plan Ahead

Research shows the happiest retirees start planning at least five years before their desired retirement date. The earlier you start to plan, the more knowledgeable you become about your situation, your options, and the financial aspects that you must monitor when managing the retirement phase of life.

The sooner you run the calculations, the sooner you will find out if have enough to retire and by what age it is feasible. Although it can be scary to sit down and run the numbers, if your plan shows the possibility of coming up short, you can proactively address your options to improve your future. There are plenty of choices available to you, especially if you’re open to making changes to your lifestyle. Perhaps you can work a bit longer, find ways to earn extra money, reduce expenses, or move to a lower-cost area, such as from the suburbs to a metropolitan area where you don’t need a car, or from a high-tax state to a small town in a different area of the country.

If you don’t have a lot of savings and are willing to live on less to reach retirement sooner, you might consider an alternative retirement lifestyle. You can explore becoming an ex-pat in a country like Portugal, where it’s cheaper to live, or live in an RV in a campground and earn part of your keep as the campground manager.

Or, like many clients we work with, you may be surprised to find out you already have enough. More than half of the clients we work with are shocked to discover their retirement dreams are well within reach, with no need for them to make any substantial changes. And about one out of five of our new clients discover they can retire sooner than they thought. It’s a lot of fun to get to deliver this news. To deliver this news, we have to be certain. And the only way we can be certain is by running oodles of calculations.

Calculating How Much You Need to Retire

Retirement calculations start with your current lifestyle, spending habits, and projected spending in retirement. To see how to figure this part out, check out this webinar on how to build a retirement spending plan.

Once you have expenses outlined, you calculate your income sources such as Social Security, pensions, deferred compensation payouts, annuity income, and rental income. You compare that income to your expenses to determine “the gap.” The gap shows how much you will need to withdraw from savings and investments each year to support your retirement lifestyle.

Here’s a simplified version of how this type of retirement planning calculation works.

Let’s say you anticipate spending $75,000 a year in retirement, and you estimate you will have $35,000 a year in fixed income (Social Security, annuities, and pensions). The gap you need to fill by withdrawing from savings and investments is $40,000 a year.

Next, you need to know if your level of savings and investments can support $40,000 per year in withdrawals for approximately 30 years into the future. Here’s a simplified example of how to look at that.

With simple math ($40,000 x 30), that adds up to $1,200,000 of withdrawals over your expected retirement lifetime. If you have more than that now, or you will have more than that saved by age 65, you will almost certainly have enough to retire by that age.

The simple calculation above uses the “under the mattress” method by assuming your savings earn no interest in the years leading up to retirement and will earn none during 30 years of retirement.

If you plan to use a portfolio of retirement investments to accumulate and distribute retirement funds, you can factor in a rate of return greater than zero. Let’s assume that you can count on 3% annual returns, which means your savings and investments earn enough to keep pace with inflation. Past returns for a balanced portfolio have been higher than this, but it’s not wise to count on historical average returns because you will earn something less than average at least half the time.

How much do you need to accumulate to take $40,000 per year in withdrawals for 30 years if you receive a 3% return on your nest egg? Using a present value calculation, the amount is $784,017. Present value is the amount you need to have in the bank today to deliver a future stream of cash. And it’s considerably less than the $1,200,000 in our previous “under the mattress” calculation.

In this example, if you have more than $784,000 saved by age 65, and you reasonably expect it to earn 3% a year or more, you have enough to retire. If you have less than $784,000, you may need to work longer, save more between now and retirement, or plan on spending less in retirement. For example, if you cut spending by $5,000 a year, you would only need to withdraw $35,000 a year and the present value of $35,000 for 30 years, assuming investments earn 3%, is $686,015.

The calculations above don’t account for taxes, nor do they factor in changes you can make that can improve your outcome, such as the timing of when you begin Social Security and which accounts to draw from in which tax years. They also don’t account for the fact that income sources such as Social Security or pensions begin at different times. The result is that in the age range of 55 to 72, what we call the Opportunity Zone, you are likely to be withdrawing varying amounts each year.

For a comprehensive class on how to layout your retirement plan, check out our How to Make a Retirement Income Plan class recording on YouTube.

Once you’ve done the calculations, you can move on to the softer side of retirement.

The Psychological Side of Retirement Readiness

Do you see yourself enjoying endless days of reading, yoga, gardening, and golf? As you daydream about retirement, give serious thought to the activities that interest you. What hobbies would you like to begin or re-start? Are you going to travel extensively in your first years of retirement when you have the energy and stamina to do so? Which organizations inspire you?

For some, retirement is an exit plan from an unpleasant job. Take time to assess whether you are looking at retirement as an escape hatch from your current situation or if perhaps you could reconfigure what work looks like, even if making a job change comes with a reduction in pay.

Or, would you like to continue working in some way, not just because of the income but also for the sense of contribution it provides to you? I’ve seen future retirees who are not cut out for retirement. They like the fast pace, the social interaction, and the sense of purpose and responsibility that comes with a job. If this sounds like you, the answer to when you should retire could be never. Or at least not anytime soon.

The Best-Laid Plans…

You can’t always plan out your retirement date exactly the way you want. Sometimes life has something else in mind. Companies restructure. Pandemics come along (hopefully only once in a lifetime, but you never know!)

Once your plan is in place, you’ll know what items need to be adjusted if your retirement date shifts (often due to health reasons, changing job requirements, or the economy). I’ve seen this occur many times.

One example is a couple I’ll call Greg and Kara. They ran a small business and were thinking of selling it. When we put together their retirement plan, they realized the amount they could safely withdraw was not enough to support their desired retirement lifestyle. They rallied and focused on building the business. A few years later, Greg passed away unexpectedly. Because we had a framework in place, Kara was able to evaluate her options quickly. She couldn’t run the business on her own, so she located a buyer, sold the business, and went to work part-time for a former employer doing something she enjoyed. The decisions were stressful, but the stress was minimized because she and her husband had taken the time to do the planning. She was emotionally and intellectually equipped to make the needed shifts.

Fundamentally, retirement is about the alignment of two things: money and values. When anxiety about money is foremost, we neglect the values side. With a sound plan to handle the financial side, it frees up energy to focus on the values side. Then, you’ll be well-positioned to live the life you want to live with little anxiety. That is indeed something to strive for.

To learn more about how to make a rock-solid plan to transition out of the workforce, check out the 5-star rated book, Control Your Retirement Destiny, or the How to Plan for the Perfect Retirement lecture series on TheGreatCourses.