Retirement planning doesn't look the same for any two
people, but there are some ways to know that you're ready financially before
you leave work.
Insider talked to three financial planners about the signs
they see when clients are ready to retire.
According to their experience, you'll start to notice these
six things if you're ready to retire.
1. You won't be dependent on Social Security payments
If you've run the numbers and you won't be depending on
Social Security payments much, you might be ready to leave work, says financial
planner Jovan Johnson of Piece of Wealth Planning.
"For somebody trying to reach retirement, the goal
should be to have enough money to retire comfortably. And if you do receive
Social Security, that's just icing on the cake," he said.
Ultimately, being self-reliant in retirement is the best way
to be sure you'll be comfortable.
2. You have 10 times your annual take-home pay saved for
retirement
Financial planner John Bovard of Incline Wealth recommends a
simple rule to judge retirement readiness.
"One quick rule of thumb if you're looking at what
dollar amount you need to have saved, I would say would be 10 times your net
take-home pay," he said.
By multiplying your annual net take-home pay by 10, you may
have enough saved to retire comfortably.
3. The 4% rule works for your monthly budget
A favorite way for financial planners to make a ballpark
estimate on how much you'll need to retire is the 4% rule, where you withdraw
4% of your portfolio each year in retirement. From there, you can divide that
amount by 12 to make sure it fits your monthly budget.
"If you can withdraw 4% of your retirement balance
every year, plus your Social Security, and if that number can replace your
take-home pay, then you're in a good spot to be able to retire," Bovard
said.
This rule can also be used inversely to figure out how much
you need to have saved. Multiplying your desired annual income by 25 can give
you the amount you'd need to withdraw 4% each year and live comfortably.
Reaching that figure could be a sign that you're ready to retire.
4. You can afford to pay for healthcare and know what it
will cost
If you've thought about how you'll cover healthcare in
retirement, you're likely in good shape to retire.
Healthcare is a massive expense, and it's even bigger if
you're thinking about retiring early. "What keeps people working the
majority of the time is being Medicare-eligible," Bovard said, which
doesn't happen until age 65.
"Look not only at your regular treatments, but be very
aware of what prescription drugs you're taking," he said. These can be big
expenses that add up, and knowing how much you could potentially need to spend
will be critical. You'll need to add up how much it will cost you to afford coverage
until age 65, prescription drug costs (which may not be covered under
Medicare), and routine needs.
5. You've paid off debt, including your mortgage
Paying off debt is one of the traditional signs you're ready
to retire, and it's one financial planners say is critical, too.
Johnson recommends having your mortgage paid off as a first
step. "I lean towards when somebody has their mortgage paid off, because
we all know that's the biggest thing that hurts people in retirement," he
said.
Other types of debt, like auto loans, can also be
detrimental in retirement. Paying off these loans can be a good first step
towards retiring.
"Once they have that paid off and they have no student
loans, that puts them in a great position," he said. "I feel like they
are in a better position to retire because they don't have to worry about debt,
and their expenses decrease so much."
6. You've made a detailed budget for retirement, and it
works with what you expect to bring in each month
Financial planner Corbin Blackwell with Betterment for
Business says that she likes to see clients have a very detailed budget before
they retire.
"I would say the biggest one is making sure you have
thought through your retirement budget, and in-depth thought it through,"
she said. You know exactly what you're spending and where you'll cut back and
spend less in retirement.
To start making a budget, it's a good idea to take a look at
your current expenses. Then, you can start to see how they'll change in
retirement, where you can save more, and what will be more important to you
later on.
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