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Not Sure You Can Afford Retirement? Do a Trial Run.

By Maurie Backman - Mar 2, 2020 at 7:52AM

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Rather than stress about your post-career finances, see what living on less is actually like.

The scary thing about retirement is adjusting to life on what could very well end up being a lot less income than you're used to. This especially holds true if you haven't accumulated a lot of retirement savings, and you can expect to be largely dependent on Social Security once your career comes to an end.

But one thing you really can't afford to do is retire before you're financially ready. If you leave the workforce only to find that you just don't have enough income to keep up with your essential expenses, then you may find yourself in a tough spot. Of course, in that scenario, you could attempt to un-retire and go back to work, but that's easier said than done, since older employees tend to have a more difficult time getting hired than younger ones. And you could try working part-time in retirement to make ends meet, but that could mean subjecting yourself to jobs that are physically or mentally draining -- jobs you may not have patience for later in life.

Older man at supermarket

IMAGE SOURCE: GETTY IMAGES.

How do you avoid a scenario where you retire only to find that you can't really afford it? It's simple: Do a trial run.

Give retirement a whirl before it becomes your reality

If you're not sure how well you'll manage once you retire and your paycheck from work disappears, take a year to experiment and find out. First, review your latest Social Security earnings statement to get a sense of what monthly benefit you can look forward to in retirement. If you're in your late 50s or beyond, that estimate should be fairly accurate.

Next, see how much money you have in savings and assume you'll withdraw 4% of your balance annually. You might land on a different withdrawal rate once you retire, but for trial run purposes, 4% is a decent starting point.

Finally, factor in any additional income you expect to have access to as a senior, such as bond interest in a traditional brokerage account or rental income, if you own a home and expect to take in a tenant. Then, add up your total annual income and try living on that sum for a year. If you find that you're not coming close to paying your bills, then you'll need to rethink your retirement plans. That could mean delaying retirement and working longer to boost your savings and grow your Social Security benefits, or it could mean rethinking the retirement lifestyle you expect to lead.

Here's an example. Imagine you currently earn $75,000 a year, or $6,250 a month. Let's also assume you're entitled to $1,600 a month in Social Security, and that your $420,000 IRA balance will give you another $16,800 a year, or $1,400 a month, for a total of $3,000. For simplicity purposes, we'll assume you have no other sources of retirement income to work with.

Clearly, $3,000 a month is a lot less than $6,250. (And to make things even, let's assume that both figures are pre-tax. You'll pay taxes on your wages during your working years, but you'll also pay taxes on non-Roth retirement plan withdrawals as well as Social Security benefits if you're not a low-income senior.) As such, it pays to see if you can live on $3,000 a month comfortably.

If your living costs outside of commuting and job-related expenses total around that much, and you expect your costs to be similar in retirement, then you're all set. But if you find that you're struggling financially because you typically spend well over $4,000 a month not including expenses related to going to work, then you'll need to rethink your retirement plans. However, doing that trial run will help you determine whether you're well-positioned to afford retirement or not, thereby taking most of the guesswork out of the equation.

Know what you're in for

Rather than spend the years leading up to retirement worrying about what that period of life will cost you, try living off of what would be your retirement income for a year, and see how that works out. And if you find that it's not feasible to live on that sum, map out a plan to address that shortfall. That plan could include spending more time in the workforce to boost your nest egg, downsizing your home as a senior, or moving to a less expensive part of the country. There are numerous options you can play around with, but the key is to arm yourself with knowledge ahead of time rather than dive into retirement and simply hope for the best.

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