How to retire
When will you retire? Can you afford to retire?
How do you determine the answers to those questions?
Here’s a simple question and answer plan to determine when and how you can retire.
(The terminology and definitions herein are intended to facilitate learning and do not necessarily match professional accounting terms and definitions. We do not offer retirement planning; see our Disclaimer & Disclosures)
How big is my nest egg?
You should start with an assessment of your assets available for retirement. Include all tangible and intangible assets that will be available for you during your retirement (liquid assets like checking, savings, and investment accounts). If you plan to remain in your current home, don’t include the equity, since you can’t access it without increasing your mortgage payments. If you plan to sell your current home, compute the equity by subtracting all mortgages and assessments against that property from the actual current value (not what you hope to get). There are websites like zillow.com, trulia.com and realtor.com that can show you your home’s current market value. The grand total of all cash, savings, investments, and real estate equity is your net assets.
What debts will I have when I retire?
We assume you have already included your mortgages in your real estate equity assessment in question 1 above. Now add up any other loans you owe: credit cards, charge accounts, car, boat and trailer loans, and any other debts you owe. We call this simply your debt (also called liabilities). Subtract this debt from your net assets to determine your net worth.
How much do I wish to set aside for inheritance and paying down debt?
Next, determine what you want to set aside (reserve) for inheritance for your children or other heirs. Also determine how much debt you will pay down in the short term—this should include credit cards, charge accounts, and any other short-term debt. From your net assets, subtract the inheritance set-aside, short-term debt, and any other assets not available to you now. The remainder is your available assets. This amount defines the amount available for a future home down payment and/or annuity purchase.
How much income will I get from Social Security, pensions, and existing long-term annuities?
Next, compute how much income you will receive from social security (based on your proposed retirement date), pensions and annuities. Only count existing annuities that will continue for the rest of your life. This total is your base income.
How much am I willing and able to earn from a part-time job or self-employment after retiring?
Next estimate the realistic income you will receive from a part-time job or self-employment. Be careful not to speculate; make sure you have a marketable skill and a solid plan for earning income from it. Call this supplemental income.
How much income can I count on from my nest egg?
Now you want to arrive at a monthly retirement fund payout that you can include in your income. From your available assets, subtract an amount of money that will cover the down payment on a new home and subtract an emergency fund of at least six months net living expenses (see below). The remainder is your retirement fund. An efficient way to structure this fund is an annuity; ask a trusted accountant or an investment or retirement planner if an annuity is right for you. The primary advantage of an annuity is a reliable stream of income for the rest of your life. Your monthly retirement fund payout should never exceed an amount that ensures that your assets will survive as long as you do. It may be as much as 3-4% of your retirement fund or a larger amount if you do not need to preserve your nest egg for an inheritance. Be sure you get professional advice in dealing with your retirement fund and its payout; this is a crucial part of your retirement strategy.
How much income will I have to retire on?
Add together your retirement fund payout, base income, and supplemental income on a monthly (or annual) basis to determine your net income.
What will be my living expenses in retirement?
Now you need to look at what your cost of living budget will be in retirement. If you don’t plan to move, the answers should be easy; if you plan to move, this will require research. Living expenses will generally include the costs of food, medical care and medicine, fuel or other transportation expenses, utilities, phone, cable, memberships, health, dental, and auto insurance, as well as any other expenses routinely paid every month (or year). Divide it into an average monthly amount and call it living expenses.
What new expenses will I incur in retirement?
Hopefully, you have already subtracted expenses that you will lose when you retire, like commuting costs, parking, wardrobe, etc. in 8 above. Now look at what new expenses you’ll incur, like Medicare (now over $100 a month), golf fees, additional travel expenses, hobbies, and recreational expenses. Add these new expenses to your living expenses in 8 above and call the new total net living expenses.
What will be the ongoing mortgage (or rent), taxes, insurance, and HOA costs of my retirement home?
If you plan to sell your current home, this step will take a great deal of research and evaluation. You need to determine what you expect to pay out each month for housing expense. This would include mortgage, real estate taxes, home insurance, and HOA fees for your retirement home. Because you have not bought the new home yet, you’ll need to determine the average cost of homes in the area where you intend to retire, average HOA fees for the type of community you desire, and tax and insurance costs. If you plan to rent, your task is less difficult. We also offer help in finding your retirement location.
Do I have enough income to retire?
At this point, it’s time to do a little math. From your net income, subtract your housing expense and net living expenses. Hopefully, the result will be a positive number; if so, you’re thinking you are ready to put your retirement plan into motion. Maybe.
If you are relying primarily on current income (income base and supplemental income) and not so much on a retirement fund, you need to consider the effects of inflation on your future income. Your base income will not keep up with inflation, so you have to be sure your supplemental income will grow and carry you through. Properly structured retirement fund payouts generally take inflation into account, so a good nest egg is a hedge against inflation. In the end, you can retire when the numbers work.
When you finally think you are ready, take your plan to a trusted accountant or to an investment or retirement planner for review.
The plan we’ve laid out here doesn’t go into a great deal of detail—we are not professional planners. When your plan has been blessed by a professional, have a happy retirement!
Otherwise, if the numbers don’t work, you will need to do some tweaking, as covered next.
What if I don’t have enough income left to cover my retirement cost of living?
Let’s look at some places in the plan that you can tweak. Look again at your inheritance set-aside; are you sure you want to delay retirement to ensure that your heirs share in your nest egg?
If you are working and have not started taking Social Security, you may have to work a few more years until the numbers work for you. This is discouraging, but sometimes there’s no choice.
Delaying the start of Social Security benefits increases that payout by about 8% a year.
If you are close to breaking even, consider marketing your skills or sales abilities on the Internet. A portable self-employment business is perfect for some retirees.
Another option would be to look at scaling down your future housing expense. Maybe the extra bedroom for visiting family or friends could be eliminated. Maybe you can’t afford that ocean view home.
Consider investigating some cheap places to retire. In most cases, there is a home somewhere in the USA where you can retire on the funds you have. Several nearby countries have affordable homes and a much lower cost of living. It’s not for everyone, but retiring overseas can be an option, so keep an open mind.