Can you afford to retire?

Several years ago, one of my radio listeners came to me for help in planning his retirement.  When I asked him when he planned to stop working, he replied: “This past Friday!”

“How do you know you can afford to do this?” I asked.  He smiled and answered, “That’s why I came to see you!”

It’s the universal retirement planning question – can I afford to retire? – and I generally encourage folks to get the answer well before they actually stop working.  It’s a high-stakes, life-changing decision, and you need to be reasonably certain that your assets and income can support your desired standard of living once the paychecks stop.

Let me share three approaches that might help you figure it out:

1. Compare your spending needs to your expected income. Calculate the income your investments are currently generating each year: dividends, interest – any source of regular, consistent, and reliable cash flow.  To this number add any outside income you’ll be receiving, such as Social Security, pensions, rental income, etc.  Compare this total income figure with what you plan to spend each year in retirement.  Can you do what you want to do on the income you expect to receive in the future?  And will that income rise to keep pace with future inflation?  The answers to those questions might give you some idea if retirement is feasible.

2. Use an accepted rule of thumb to estimate what you can afford to spend. You’ve probably heard of the “4% rule” that says you can afford to withdraw a little more than 4% of the total value of a diversified investment portfolio during the first year of retirement and then increase future annual withdrawals by the rate of inflation.  If those planned withdrawals are enough for you to live on – and If you’re comfortable with the prospect of systematically liquidating your life’s savings in the process – you might have enough money to retire.

3. Put together a real plan. Investment income is nice to have – especially the kind that increases faster than your cost of living over time – but it’s seldom guaranteed.  And rules of thumb can be helpful shortcuts, but they are no substitute for having a plan that considers your true spending needs (including a provision for unexpected expenses).  A good plan should take into consideration your financial goals, investment and income resources, your time horizon and risk tolerance, at a minimum.  From there the plan can calculate the probability of successfully reaching those goals.

Retiring – like building your dream house – is something most people prefer to do only once.  You shouldn’t attempt either without a blueprint, because do-overs can be very expensive.

My radio listener, by the way, was very fortunate for someone who failed to plan.  Thankfully, he and his family worked hard for decades, saved diligently, and invested wisely.  That discipline, combined with some sensible spending habits and realistic expectations, has allowed them to live comfortably for many years without having to worry about money.

But they’ve had a plan for their future (almost) from the start, and they have periodically reviewed and updated it regularly throughout their retirement.  And I should know:  my team and I created it for them.

The Psychological Side of Spending Your Retirement Savings (raymondjames.com)

Any opinions are those of The Mike Brown Financial Group and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected.