At some point, we've all considered what it would feel like to retire early. When the alarm goes off early Monday morning and it takes every ounce of strength you have to roll out of bed, you're probably wishing you could just hurry up and retire already.
But retiring early can have major consequences, and most people underestimate how much they'll actually need to live comfortably. According to the latest Retirement Confidence Survey by the Employee Benefit Research Institute, 63% of workers are at least somewhat confident that they have enough money to last through retirement. Yet the average 401(k) account balance as of 2016 is just $96,000 -- and that's only enough to provide $3,200 in annual income over the course of a 30-year retirement.
So before you get too excited about the prospect of snoozing your alarm every morning, take a minute to think about whether you're ready to retire. If any of the following five statements ring true for you, then it may not be worth the risk to retire now.
1. You don't have a clear monthly financial plan
You can't know how much money you'll need during retirement if you haven't created a monthly budget. Make sure you have at least a rough estimate of how much money you'll need each month to cover necessities, as well as the amount you'll want to spend each month for other expenses -- then add a buffer, just to be safe. It's still a good idea to have an emergency fund during retirement, so make sure you'll have one by the time you leave work for good; it's harder to build up your savings when you don't have a paycheck coming in every week or two.
You also need to think about whether you'll make any major life changes during retirement, such as downsizing to a smaller house, moving closer to the grandkids, or taking that trip to Europe you've been dreaming about for years.
It's not necessary to consider every single cost -- after all, it's impossible to know exactly how much you'll be spending during retirement -- but estimating how much you'll need on a yearly and monthly basis is the first step in determining how much you need to save before you can retire in comfort.
2. Your backup plan is to continue working for years
If you retire and then find out you don't have enough money saved to last through your golden years, you can just rejoin the workforce, right? Not necessarily. While you can start working again after you retire, it's not wise to assume you'll be able to jump right back in where you left off.
If you continue to work -- even just part-time -- after you retire, you may lose some of your Social Security benefits. For Americans who are approaching retirement, the Social Security Administration considers their "full retirement age" to be 66 or 67, depending on when they were born. If you claim Social Security retirement benefits and then start working again before you reach that age, you may not receive your full benefits.
According to the Social Security Administration, if you return to work before you reach your full retirement age, your benefits will be reduced by $1 for every $2 you earn above the annual income limit of $16,920. If you start working again the year you reach your full retirement age, in the months leading up to your birthday, your benefits will be reduced by $1 for every $3 you earn above $44,880. All that said, you will (in theory) get that money back. When you reach your full retirement age, the Social Security Administration will pay you higher benefits to make up for the money you forfeited. So long as you reach your life expectancy, you'll eventually be repaid in full.
It's also risky to bank on the idea that you'll be able to return to your old job after you retire. The workforce is becoming increasingly competitive, and it may be more difficult for older workers -- especially those who have been out of practice for a few years -- to return to work. Senior citizens are also more prone to injuries and illnesses that could prevent them from working.
While there's no harm in returning to the workforce if you want to, it's a good plan to make sure you have enough money stashed away before you retire so that it's a choice, not a requirement.
3. You don't regularly check up on your savings
Not everyone likes to deal with money, and it's understandable if you dread checking their bank account for fear of what you'll find. But when it comes to your retirement savings, you can't afford not to check up on your investments.
While you may be saving a good chunk of your income toward retirement, it's not enough to simply set up the automatic deposit and hope for the best. Rather, you should check at least twice a year to see whether your savings are aligned with your savings goals based on your lifestyle, your monthly expenses, and inflation.
Plug some numbers into a retirement calculator on a regular basis to see whether you're on the right track to retirement. If not, it's better that you're finding out now, while you can still course-correct.
4. You have more debt than you're comfortable with
During retirement, you'll likely be living on fixed income. That means you won't have much flexibility in terms of spending, and every dollar will need to be spent wisely. So if you're still paying off debts, you'll be using money that could have been put toward other expenses.
The general rule of thumb is that you'll need about 70% of your pre-retirement income to live comfortably after you retire -- or more if you plan on traveling the world or taking up an expensive hobby -- and if your monthly payments and interest rates are chipping away at your savings, you won't have much to live off after you've paid your debts.
It may be wise to work a few more years to pay off as much debt as possible, making it one less thing you'll need to worry about when you do finally retire.
5. You haven't considered inflation costs
Even if you have hundreds of thousands of dollars in your retirement fund, that money won't go as far as it would today, thanks to the rising prices of goods and services.
For example, say you're 45 years old, you have a current salary of $60,000, and you hope to retire by age 65 and spend the next 20 years enjoying retirement. Assuming that inflation averages 3% per year and that you can live comfortably on 70% of your pre-retirement income, this is how much you'll need to maintain the same standard of living at different ages:
|Age||Income Required to Maintain Lifestyle|
|45 (current age)||$42,000|
In other words, even if you have half a million dollars saved, your income could fall short of your needs once you're deep into retirement. And with life expectancies rising, your retirement funds may not be able to keep up with inflation costs as you get older.
Retirement should be a joyous accomplishment in your life -- not a source of stress. The best way to avoid the stress is to keep track of your finances early and often, and resist the urge to retire early if you're not truly ready for it.
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