You've had it planned for decades: 2020 was supposed to be the year you left the workforce for good to embark upon whatever adventures you anticipated in retirement. And then, 2020 arrived, bringing one jarring event after another. The pandemic shut down our country and brought about a market downturn it could take years to recover from. And there's a chance we could repeat this whole process if there's a second wave of COVID-19 cases.
Would-be retirees now face a difficult decision: Should they continue with their original plans or put retirement off for a few more years? If you're one of them, here's how to decide by taking your current financial situation into account.
How to decide if you should delay retirement
Retiring in 2020 may still be possible if you have funds to last the rest of your life. But it's the big question right now since retirement portfolios have suffered huge losses over the last few months.
You might have some idea of how much you need to last throughout your retirement from previous calculations, so if you are short, you should know approximately by how much. But it doesn't hurt to rerun the numbers if you're afraid you'll need more than originally planned.
Note how much you currently have saved in your retirement account and approximately how many years you expect your retirement to last. It's best to plan to live until at least 90 unless you have a good reason for thinking you won't. Use your average monthly spending as a baseline for calculating your monthly retirement spending. Work with your pre-pandemic budget rather than your current budget, which likely won't be an accurate reflection of your spending when life returns to normal. Multiply this amount by 12 to get your estimated annual spending.
Then, enter all of these figures into a retirement calculator. Use a 3% annual inflation rate and estimate a 5% or 6% annual return on your investments. Your calculator should tell how much you must save overall to retire comfortably. Subtract from this amount any money you expect from a pension or Social Security to determine how much you need to save on your own.
If you've already saved this much or more, you should feel fairly confident that you'll have enough money to last the rest of your life, assuming you didn't significantly underestimate your life expectancy or your annual spending. But if you realize you don't have enough, you'll need to remedy the situation.
What to do if you can't afford to retire this year
Spending less than you'd originally planned in retirement is one way to make up the difference between what you have and what you need, but that's slightly riskier than some of the alternatives listed here. You can plan to spend less, but you don't always have control over that. A medical emergency or an insurance claim could force you to spend more than anticipated.
Delaying retirement is another option if you can continue working and are comfortable doing so. This strategy gives you more time to save for retirement while giving your retirement portfolio more time to recover from the recession before you withdraw funds. It also shortens your retirement so you'll need fewer months of savings.
How long you delay retirement is up to you. If you're close to your savings goal, a few months may do the trick, while others may need to remain in the workforce for a few more years. Rerun the calculations above with different retirement ages until you find the one that works best for you.
Rethinking your Social Security plans could also help. You may begin benefits as early as 62, but your checks increase for every month you wait until you hit 70. Starting Social Security later places a bigger burden on your savings in the beginning of your retirement, but then you'll have bigger checks that will go further later. It may also net you more money overall, but this depends on how long you live.
Even in a normal year, there's always some uncertainty about whether you'll have enough money to last your entire retirement because there are so many variables in that calculation. But though 2020 is an unusual year in many ways, the principles for deciding whether you're ready to retire remain the same. Do the math, explore a few different scenarios, and ultimately, go with your gut.