How Do I Know if I Have Enough Money to Retire?

Because there are so many factors to consider, judging whether you have enough money to begin your retirement can be tricky. 

Most of us would prefer to retire sooner rather than later, but fear about whether we can afford to do so is a common source of delay.

With this in mind, here’s how you can determine whether you have enough money to retire.

1. Decide on the kind of life you want.

Whether you plan on living, minimising your expenses and focusing on the bare essentials, or you want to travel across the world and treat yourself in your golden years, how you live will make a huge difference to how much you’ll need each year.

Planning how you’ll spend your retirement will give you a great foundation for calculating the savings you’ll need to get you through it.

2. Work out your monthly expenses.

Based on the kind of activities you want to do, the holidays you want to have, as well as essentials such as your utility costs and groceries, you should figure out how much you expect to spend each month during your retirement.

Many financial advisors state that retirees will need about 75% of their annual income, but whether this is true depends on how you spend your retirement.

It would help if you also considered costs that may increase as you age – such as medical expenses or heating bills – to ensure you don’t underestimate the amount you’ll need.

3. Consider the 4% rule.

It’s become a rule of thumb that you should only use 4% of your savings – including your investment portfolio and any retirement accounts – for each year of your retirement.

Financial experts say that this method will see you through for 30 years. However, with the average life expectancy increasing, you should err on the side of caution and aim to use around 3.5%. 

Otherwise, consider other sources of income, such as a part-time job, to supplement your retirement income.

4. Bear inflation in mind.

Especially concerning the previous point, you should bear inflation in mind. 

When you first work out your monthly expenses, you’ll come up with a figure that will help you to estimate how much you’ll need for each year of your retirement.

However, with inflation averaging around 3-4% per year (although, right now, it’s about double that), many expenses will double within 25 years. 

With this in mind, you should adjust your estimated expenses according to inflation to determine whether your nest egg can suffice.

This also means that any savings you keep in the bank and low-return investments such as CDs and cash equivalents will lose value as time goes on. 

However, those with a large proportion of their assets held in stocks – which tend to outperform inflation – and those with income-generating assets like property will be better prepared to deal with the effect of inflation.

5. Consider your debt

If there’s something you don’t want to bring into your retirement, it’s a load of debt. This will eat into your savings and make it more challenging to afford to live in your golden years.

No matter how much you’ve saved, it would be best if you prioritise paying off your debt before you enter retirement – especially high-interest debt like credit card debt.

It’s also a good idea to pay off any financed purchases, like your car, before you enter retirement. Paying these significant expenses with a regular paycheck is much better than dipping into your savings.

Lastly, if you still have a mortgage, consider whether you can pay it off with a couple more years of employment or easily fit monthly repayments into your retirement budget. If not, downsizing can be an option to help you start your retirement with an easy mind or even enter retirement earlier.

6. Talk to a financial advisor

By considering every financial factor and meticulously planning, you can determine whether you have enough money to retire.

However, planning financially for twenty, thirty, or even more years of your life is tricky. Especially considering variables such as inflation, debt and the fact that your expenses will likely change as you enter different phases of life, it’s a good idea to talk to a professional.

Financial advisors are equipped with years of experience in retirement planning. They know the common mistakes people make, the expenses often underestimated, and the factors people commonly neglect to consider when planning their retirement. 

This makes talking to a financial advisor a smart move to safeguard your retirement financially – regardless of what stage of life you’re currently in.