6 Signs That Can Tell You if You’re Financially Ready to Retire
Do you find yourself thinking about retirement with just as much fear as excitement? If so, it’s not at all surprising; workplaces seem to be full of stories about people who stop working too soon and find themselves in dire financial straits during their retirement years. In fact, according to the 2020 Transamerica Retirement Survey of Workers (an annual study now in its 20th iteration), the possibility of outliving savings and investments is the most common retirement fear, with 40 percent of American workers citing this as their top concern.
Fortunately, there are plenty of signs that can help you determine whether you are financially ready to retire. As you think about the timeline for your retirement, note how many of the following points apply to you to give you a more accurate idea of just how prepared you are to stop working.
However, while this figure may not be surprising, it is certainly concerning. For people in the workforce today, retirement planning is more important than ever, and the longer you delay taking action about it, the more potentially serious the future financial consequences can be. Although you may think that you can’t afford to save for retirement, the simple truth is that you can’t afford not to. Here are five reasons why.
1. You’ve reached full retirement age.
Even if you’ve done very little retirement planning, you’re probably aware that the age at which you retire is directly connected to the amount of Social Security benefits you’ll be entitled to. Although you can begin receiving Social Security benefits as early as age 62, you aren’t eligible to receive your full Social Security benefit until you’ve reached what is known as full retirement age (this is age 66 for workers born between 1943 and 1954 and 67 for US workers born in 1960 and later). If you do choose to claim your benefits early, the monthly benefit you’ll receive will be up to 30 percent lower than the amount you’d be eligible for at full retirement age—a significant reduction that can have big implications for your retirement finances.
2. Your debts are paid off.
One of the most important things you can do to set yourself up for a financially secure retirement is to pay off most or all of your debt before you stop working. Things like mortgage payments, car payments, and credit card interest can eat into a fixed income fairly quickly, not to mention the fact that these debts reduce the buffer you have available to deal with any unexpected financial emergencies.
Specifically, it’s quite common for workers to retire earlier than planned. As reported in the 2020 RCS, 31 percent of workers said they planned to retire at or after age 70, but only 6 percent of retirees had retired in that age range. Similarly, only 11 percent of workers said they planned to retire before the age of 60, but 33 percent of retirees reported that they had retired that early.
For many respondents, their early retirement was due to issues such as health problems or disabilities (35 percent) or to changes at their company (35 percent). As an individual worker, neither of these scenarios is usually within your control.
3. You’re not financially supporting a dependent.
If you’re providing financial support to your children, parents, or both (15 percent of middle-aged adults fall into this last category, according to Pew Research Center), it may not be financially feasible for you to stop working just yet.
A financially secure retirement assumes that, to a certain extent at least, you’ll be able to downsize and reduce some of your costs. However, this is extremely difficult to do if you’re responsible for expenses like college tuition for one or more kids or health-related costs for elderly parents. Furthermore, retirement plans tend to focus on individuals or couples only, and they don’t typically take into account the need to provide financially for other parties.
4. Your current income is (more than) enough for your needs.
Unless you’re extremely well prepared for retirement, your income is likely to take a hit as soon as you stop working (as suggested by many retirement planners and financial advisors, a good rule of thumb is to expect your retirement income to be about 75 percent of your working income). The assumption here is that this reduced income will be offset by the corresponding loss of other costs, such as retirement plan contributions, saving for a child’s education, or commuting. However, if you find that your current income is only just adequate for your needs, you may not be able to make ends meet effectively when that income is reduced by 25 percent, even if some or all of those previously mentioned costs are eliminated.
5. You don’t foresee any major expenses in the near future.
Retirement planning is all about thinking ahead, so it only makes sense to hold off on retirement until you’ve addressed any major anticipated expenses. For example, does your home need a new roof? Are you thinking about purchasing a vacation home or a new car? It’s best to deal with these kinds of expenses before, rather than after, you stop working. Larger expenses can add up quickly, and if you’re withdrawing funds from taxable accounts to pay for them, it can have a significant impact on your portfolio that can, in turn, affect your retirement income.
You and your spouse are on the same page.
If you have a spouse or partner, your retirement will have just as big an impact on them as it will on you. It’s therefore essential to share your plans with your spouse and have an open conversation about what your retirement will mean for you both, particularly in financial terms. Points that are helpful to discuss together include how your spouse will be affected by a reduced income, whether your spouse will need to work longer to cover household expenses, and what your spouse’s own plans are for retirement.