How Do I Know If I'm Ready to Retire?

It isn’t always entirely clear when we’re supposed to retire. The reality is that everyone’s situation is different. Some people have the means to retire early while others have to work their whole lives. To know exactly when you’ll be ready to retire, you’ll need to do some calculations. This will include looking at your salary, set expenses, savings, projected spending and more. In order to determine the right time to retire you may want to consider working with a financial advisor.

When Should You Retire?

Depending on who you ask about the proper retirement age, you could get different answers ranging from 62 to 70. You can technically start receiving your Social Security benefits at age 62. However, you’ll receive only a fraction of what you could receive at your full retirement age.

If you want to receive 100% of the Social Security benefits you’re eligible for, you should start by figuring out your full retirement age. If you were born between 1943 and 1954, your full retirement age is 66. Anyone born from 1955 to 1959 has a retirement age of 66, plus a certain number of months. If your birth year is 1960 or later, your full retirement age is 67.

Waiting until 70 to claim your Social Security benefits allows you to receive the full amount of your benefits in addition to delayed retirement credits, equal to 132% of your planned Social Security benefits in total.

The choice ultimately depends on whether or not you need that cash more immediately as you cut back on your working life or whether you can afford to put off receiving those benefits for a few years in order to get a more robust payout each month. Other considerations include your life expectancy typically the delay makes sense if you expect to live into your 80s and your spouse’s financial security should you pass away first.

Do You Have Enough Money to Retire?

Many retirees need about 80% of their pre-retirement income to maintain a similar lifestyle.

When it comes to saving for retirement, the rule of thumb has typically been to save between 10% and 20% of your salary each year. That should allow you to live comfortably in retirement. Another general rule states that you’ll need about 80% of your pre-retirement income to maintain your lifestyle, more or less, in retirement. Of course, if you’re planning to live either more lavishly you can save accordingly.

Perhaps it will help to take stock of your savings through a retirement calculator now. Also estimate how much you think you’ll need to live comfortably in retirement. That will help you check whether you’re on track and whether you perhaps need to cut down some potential expenses in retirement.

A financial advisor can really come in handy here to offer professional guidance. He or she can take a comprehensive look at your current financial situation and create a financial plan to help you reach retirement. Our financial advisor matching tool can connect you with advisors qualified to help you with your finances.

Can I Retire Early?

With full retirement age for Social Security set at 67 for anyone born in 1960 or later, retiring early may be too difficult for most people. But if you’re already surpassing your savings goals, then perhaps an early retirement could work for you. You’ll want to make sure any extra years in retirement will be covered by your savings. This is especially crucial if you retire before you can start taking Social Security payments as early as age 62.

Carrying debt does not automatically mean you cannot retire. The more important question is whether your retirement income and savings can support required debt payments along with your other expenses. High-interest debt or large required payments can put additional pressure on a retirement budget, especially after employment income stops.

You’ll also want to have a healthcare plan in place if you want to retire early. You’ll become eligible for Medicare at age 65 in most cases. Before that, you may have to rely on private insurance or your spouse’s insurance. Your former employer may even be able to extend some coverage to you in retirement through COBRA or another retiree health plan, if available. Without your workplace insurance, you could end up in some real trouble should you need medical care.

Medicare eligibility generally begins at 65, but retiring before then can leave a healthcare coverage gap that may last several years. When estimating the cost of early retirement, include premiums and expected out-of-pocket medical expenses for the period before Medicare coverage begins.

Considerations for Retirement

The right time to retire is going to vary by person. If you’re not sure how to tell if you’re ready to retire then there are some key reasons you can look to in order to make that decision. Here are some of the things you can think through to help you decide.

You Age Into Retirement: Most people retire because they hit the right age to retire and are ready to be done working full-time. This could be the first key ingredient to making that decision.
You’re Debt Free: If you’ve paid off all of your debt, including your mortgage, then you might be ready to retire. Retirement income is typically less than your regular full-time income so it’s important not to carry debt into your retirement.
You’re Not Supporting Anyone: Individuals nearing retirement age may find themselves supporting adult children or parents. Not having any additional people who rely on your income is a good sign that you could be financially ready to retire.
Your Retirement Account Matches Your Budget: When your retirement accounts match up to your potential retirement budget then you might be ready to retire.

These are some of the first things you can look at to determine when your finances are ready to retire but the best time for you is going to depend on more than just the money you have saved.

Test Your Retirement Income Before Leaving Work

A retirement date can look affordable on paper until you compare expected income with the expenses that will actually come out of it. Before leaving work, build a retirement budget that separates dependable income, such as Social Security or a pension, from withdrawals you expect to make from investment accounts. Then compare the total with housing, food, insurance, healthcare, taxes, travel and other planned spending.

For example, suppose you expect to spend $70,000 during your first year of retirement and anticipate $38,000 from Social Security and a pension. That leaves $32,000 to come from savings or other income:

$70,000 – $38,000 = $32,000

If you have $800,000 available for retirement withdrawals, the first-year $32,000 withdrawal equals 4% of that balance. That percentage alone does not determine whether the plan will last. Investment returns, inflation, taxes, future spending changes and the number of years you remain retired can all change the outcome.

Running the calculation with higher expenses or lower investment returns can show how much room your plan has for setbacks. If a modest increase in spending would quickly exhaust your savings, delaying retirement, reducing planned expenses or building additional savings may improve the numbers. A plan that can absorb some variation gives you more information about your readiness than reaching a particular age or account balance by itself.

Bottom Line

If you plan to travel more or spend more in retirement, you may need to save beyond the typical guidelines.

When you can retire and when you should retire are often two different things. You can retire with reduced Social Security benefits at 62, but you won’t yet have Medicare coverage. At 65, you’ll have Medicare, but still may not have access to your full Social Security benefits, depending on when you were born. And waiting until 70 to take your Social Security benefits can result in a larger monthly payment than claiming at full retirement age.

There are a lot of factors you have to take into account before deciding when to leave the workforce, including whether your expected income, savings, healthcare coverage and spending can support the retirement you have planned.

“You know you are ready to retire when the assets and income sources available to you are sufficient to support your needs. You can estimate that with planning tools like Monte Carlo analysis or withdrawal rate statistics,” said Brandon Renfro, CFP®.

Brandon Renfro, CFP®, RICP, EA provided the quote used in this article. Please note that Brandon is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Tips on Saving for Retirement

A financial advisor can help you create a financial plan, properly prepare your finances and help you know when you may be able to retire. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you know now when you’d like to retire, maybe it’s time to amp up the retirement savings. In an ideal world, you’re already contributing to your 401(k) if one is available to you, but are you using your employer match program? Not all employers offer 401(k) matching, but if yours does, you should definitely take advantage of it. Typically without much extra effort from you, you can benefit from free money hitting your retirement savings account each month.