Can I Afford to Retire?

Maybe it’s because Julie and I are both in our 50s, but it seems like clients are asking more often, “When can I retire?” They know they probably can’t retire immediately, but maybe in five years? Or 10?

Of course, it takes careful planning to arrive at the retirement age that’s best for you. But it’s a process that’s most certainly worth your time…and it’s much better than just crossing your fingers and hoping it all works out.

Newly retired couple

What does “retirement” mean to you?

We always ask our clients this first: What does retirement means to you? Do you want a second career? A second home? To travel the world? Or would you rather relax and take your lifestyle down a notch?

Your answer to this question will go a long way toward helping to determine how much annual income you’ll need during retirement. That, in turn, will help you decide how much you need to have saved in advance.

What’s your current net worth?

Before you can figure out where you’re going, you have to know where you are now. So…what’s your current net worth? If you don’t know, it’s pretty simple to figure it out: Net Worth = Assets - Liabilities

  • Assets include your home(s), investment accounts, cars, etc.
  • Liabilities are mortgage(s), car loans, credit card balances and any other kind of debt.

Finally, subtract your total liabilities from your total assets. That’s your net worth.

How much are you spending now?

How much do you absolutely need right now to cover your monthly expenses? In other words, what do you need to “cover your nut” (i.e., break-even)?

Make sure to include:

  • Mortgage/rent
  • Car payments
  • Credit card payments
  • Any other debt
  • Utilities
  • Taxes
  • Kids’ education
  • Food
  • Clothing
  • Insurance
  • Entertainment
  • Spousal/child support
  • Anything else that you normally spend money on

This can be an eye-opening experience—in ways both good and bad. Often, it highlights expenses that can be reduced or eliminated entirely.

How much are you saving now?

Take a good look at how much you already have saved—and how much more you’re saving each year. Include retirement accounts [401(k), 403(b), IRA, etc.] and other kinds of investments (non-retirement mutual funds, savings accounts, etc.).

As far as ongoing savings, are you maxing out your retirement contributions? For 2021, employees can contribute up to $19,500 in a 401(k) plan. Employees age 50 or older can make an extra catch-up contribution of $6,500.

Will your expenses change during retirement?

When you retire, what will your expenses look like? Will they be lower because your mortgage is paid off, and the kids are out of college? Or could your expenses be higher?

Where will your health insurance come from, for instance? How much will that cost?  

Also, consider that one (or more) of your adult children may want to live at home for a while. If that happens, what’s your plan? One suggestion we make to our clients is to have your adult child pay room and board similar to if they were maintaining a one-bedroom apartment independently. 

We view that as a healthy arrangement. Then, parents aren’t delaying or shorting their own retirement, and grown children have some sort of expectation of what they need to earn to support their lifestyle. It can also help them to avoid establishing bad habits related to travel, clothing and entertainment.                                  

This may also define your answer to the “What does ‘retirement’ mean to you?” question. How might your goals for retirement impact your living expenses? Are there ways you can adjust those goals to make them more financially feasible?

What’s your life expectancy?

No one knows what the future holds, of course. But your family history can offer clues to how long you might expect to live.

According to the most recent Actuarial Life Table from the Social Security Administration[A1] , someone age 50 today can expect to live about another 30 years (a little more for women, a little less for men). Depending on when you retire, that could mean 20 years (or more) in retirement.

Where will your retirement income come from?

Once you retire, how will you generate income? If you’re lucky enough to have a pension plan, think about how and when to start drawing income from the plan. Single for life? Survivorship?  We regularly strategize with our retiring clients to maximize their lifetime pension payout.

You should also figure out how much you’ll receive in Social Security retirement benefits. You can start at Keep in mind that decisions you make in the future can affect your retirement benefits. Widows who remarry before age 60, for instance, risk losing their deceased spouse’s Social Security benefits.

Do you own real estate that could be used to generate income? Rental property or farmland are two examples of assets that can add to your cash flow during retirement.

Once you exhaust these and any other non-investment options for income, you can look at drawing on your retirement investments for income. At the final step, it’s very important to work with a professional to determine how much you can safely withdraw so your funds last your lifetime.

Keep long-term care in mind

It’s also important to address the reality that health changes usually occur later in life. According to the U.S. Department of Health and Human Services,

  • Someone turning age 65 today has an almost 70% chance of needing some type of long-term care services in their remaining years
  • Women generally need care longer (3.7 years) than men (2.2 years)
  • One-third of today’s 65 year-olds may never need long-term care support; but 20% will need it for longer than five years

Long-term care insurance can be a tremendous asset—we’ve experienced this with our own families. Just be realistic. If you’re considering coverage for “median”-level nursing home care, really think if that would be somewhere you would consider living. (Do you live in a “median” neighborhood now?) 

Many people say they want to stay in their homes and have help come in as needed. That’s certainly an option, but keep in mind that there’s a point of diminishing returns with that strategy.

We were shocked to learn recently, for instance, that 24-hour care from a home health company costs about $19,000 a month. Full-time nursing-home care, on the other hand, currently runs about $8,250 per month.

We can help

As you can see, there are lots of “what ifs” when it comes to deciding when you can retire. We can help you consider all of the angles and create a plan that works for you now and in the future. Contact us to get started.