When you’re just beginning your career, retirement may be the last thing on your mind. Then, next thing you know, you’ve hit the age when you’re ready to wrap up your career and sail into the enjoyment of your golden years.
As you arrive at those crossroads, here are five retirement questions you should be asking – and answering – that will help you navigate those waters.
1. When will I retire?
As a working American, there is a good chance you will retire between the ages of 60 and 70. But, there is no particular age etched in stone, nor is there a crystal ball that will reveal the answer.
In a 2014 Gallup poll, the average age American retirees reported retiring was 62, which is the highest reported age since Gallup began asking this question in 1991. In 2002, non-retired Americans reported that they expected to retire at 63. In 2014, that age rose to 66.
But, according to the 2015 Retirement Confidence Survey from the Employee Benefit Research Institute, about half of U.S. workers retire before they expect and of those, 60 percent leave the workforce early because of health or disability issues. Others retire early due to company downsizing, or to care for a family member.
2. Will I be able to pay my bills?
The answer to this question is twofold. First, you need to identify and itemize your expenses. Add up everything you need to pay and include a little cushion for “emergencies.”
Second, determine your sources of income, total income stream, and the cadence. If these two numbers aren’t supporting one another, consider strategies to make changes (e.g., cut unnecessary expenses, revise your investment portfolio, etc.) Once you have an idea of how much you will be receiving, you can measure that directly against your income. This will provide a full view of your debt-to-income ratio and what you will need to pay your bills and do anything beyond.
Because there is a lot that can factor into this equation and life events and unexpected expenses things can change your circumstances quickly, you must have a fluid financial strategy that can withstand some fluctuations and changes in your situation.
3. How much will I spend?
In Moshe Milevsky’s book, “7 Most Important Equations for Your Retirement,” he cites that most retirees are told they should plan to replace 70-80 percent of their pre-retirement income and spend no more than 4 percent of that total through each year of retirement.
To explain this, Milevsky uses Irving Fisher’s equation, which he explains is the “first to tell us how to properly accumulate and spend our next egg.”
The aforementioned “equation” considers four factors: the real interest rate your nest egg is earning while it waits to be spent; your personal rate of patience or your subjective discount rate, the probability of surviving for one year, and your attitude toward longevity uncertainty.
So without being too mathematical regarding the use of formulas, consider the following questions and answers:
What do you have to pay for on a monthly/quarterly/annual basis?
- Do you plan to travel?
- Will you return to college and pursue a degree?
- Will you pick up a side gig or a second career to live out a dream or keep you busy?
Once you paint the picture and factor in other individuals who may influence your spending (e.g., spouse, children, grandkids), then you can plan accordingly and determine your situation.
4. Will social security help me?
Some assume that Social Security payouts will help them sustain an income through retirement. Introduced in the 1930s, Social Security aimed to help people out – not to become their only source of retirement income. As of now, the average monthly Social Security payout is $1200, which equals a $14,400 per year and as compared to an annual salary, would put someone just above the poverty line.
The fate of Social Security benefits is also undetermined, and there is no guarantee that the program will remain “as is” when it’s your time to begin receiving payments.
Due to the uncertainty around payout amounts, Social Security may become a supplement to your retirement income, but most likely, it won’t solely help your support the lifestyle that will make you happy in retirement.
5. Will retirement be fun?
Retirement will be what you make of it. Although money doesn’t create happiness, it does create the opportunity to live your ideal lifestyle. When you have a comfortable nest egg, you will be able to focus on the things beyond your finances that matter most.
Your money can help provide freedom to travel, visit with family and friends, start a new business, take up hobbies, go back to school and give back to charitable organizations or missions.