One of our favorite things to say at Grey Ledge Advisors is, “You have enough.” With these three words, we can deliver the joyful news that a client’s retirement savings will allow them to comfortably retire.

Choosing when to retire can be a tricky question. In order to exit the workforce and enjoy a stress-free retirement, you need to determine an amount that can cover all the anticipated expenses of your post-work life.

Our financial advisors work with each client to determine their individual needs and when they have hit this magic number. While this figure is different for each person, there are several things you’ll need to consider to determine if you’re ready to retire.

How much is “enough” for you?

There are essential expenses that retirement savings must cover, such as housing, food, health care, and taxes. However, retirement also tends to come with substantial lifestyle changes. One needs to be prepared not only to meet regular expenses, but also to pursue any goals they hope to achieve.  

Here are some of the key things to take into account when determining if your retirement savings are enough to support your preferred lifestyle:

• Housing: As the dominant expense for many households, this expense plays a major role in retirement planning. If you’re planning to remain in your current residence, you’ll need to account for any remaining mortgage payments as well as ongoing homeowners insurance, property taxes, utilities, maintenance costs, and renovations that can assist with aging in place. If you are planning to move, you must consider any changes in housing costs, as well as any potential income you’ll receive from the sale of your current home.
• Health care: Health care costs can be difficult to predict. It’s important to consider your current insurance, any changes you anticipate to your coverage, and the cost of any current medications or procedures. Since long-term care is often necessary in your elder years, you should plan for self-funding this expense or including long-term care insurance as part of your planning. 
• Transportation: If you plan to continue driving after retirement, you’ll need to account for regular vehicle maintenance and insurance as well as the need to periodically purchase a new vehicle. Alternatively, you’ll need to determine the costs associated with using public transportation or other options if you opt to make this change in retirement.
• Taxes: Depending on how your retirement savings are structured, you may need to pay taxes on the funds you withdraw. Your retirement planning should take steps to optimize your taxation to avoid unnecessary expenses.
• Travel: Many people enjoy a “honeymoon” period during retirement, using the occasion to travel to destinations they’ve always wanted to visit. This can significantly increase spending during the early years of retirement before it settles back into a more regular rhythm. 
• Discretionary spending: You may decide to take up new hobbies during your retirement or treat yourself more frequently to dining out, going to concerts, or other activities. These can all lead to added expenses that should be accounted for when planning for retirement.

Sources of retirement income

The goal of retirement is to have enough money saved up that you’ll have a steady source of income in your later years. These funds can come from a variety of sources, so you’ll need to consider all potential options when determining if you’re in a good position to retire:

• Retirement accounts: Once you retire, you can begin making withdrawals from your 401(k), IRA, or other retirement account that you’ve built up during your working life. These can begin at any age, although required minimum distributions currently must take place starting at age 73.
• Social Security: This benefit offers some extra income during your retirement, though the amount you receive will vary based on when you begin collecting it. You can claim Social Security as early as age 62, but receive a higher benefit if you delay collection to a later age. You should also be wary of relying too heavily on this benefit, due to the potential for future adjustments such as benefits reductions in order to keep the program solvent.
• Part-time work: You may not want to give up working entirely in your retirement, instead opting for a reduced schedule that provides some additional income. Be aware that this can reduce your Social Security payments if you have not yet reached your full retirement age. You’ll also need to set a realistic timeline of how long you will be able to — or want to — work part-time.
• Other income: Additional income can come from sources such as separate stock portfolios, rent from properties you own, annuities, royalties, or the sale of assets such as real estate or valuables. 

Important things to remember 

Certain factors will determine whether the money you’ve saved is enough to support your retirement and meet your individual goals. It’s important that you remember them as part of your planning:

• Longevity: Life expectancy has been increasing over time, reaching about 75 for men and 80 for women. This, in turn, means you’ll need to save up enough to cover this extended time period — especially if you’re hoping to retire early. While you can never be certain how long you’ll live, factors such as family history can provide a helpful guide. You should also save up enough for a buffer period beyond your anticipated lifespan. 
• Inflation: The cost of living increases over time, so any retirement planning should account for inflation. Although annual inflation has fluctuated over time, it has averaged about 3 percent over the long term.
• Emergency fund: It’s always a good idea to keep an emergency fund for unexpected home repairs, medical costs, or other major expenses. It’s important to maintain one in retirement as well.
• Investment strategy: Once you reach retirement age, the investment strategy for your retirement savings should typically switch to more conservative and stable options that can reduce risk and generate consistent returns. While this reduces the possibility of large gains that come with higher risk strategies, it also minimizes the possibility of substantial losses in your retirement savings. A reduction in risk profile does need to be balanced with the idea that you’ll still remain invested for decades once retired. 
• Legacy planning: If your retirement savings have sufficient buffers, you’ll not only have enough money to live comfortably in retirement but also be able to leave money to family members or charitable organizations after your death. Your retirement planning should be paired with careful estate planning to ensure that proper directives are in place for the distribution of any remaining assets.

Retirement planning calculations

There have been various suggestions on how to calculate whether you have enough saved up to retire. One is the “4 percent rule,” which suggests that you have enough on hand to subsist on withdrawing 4 percent of your assets each year — which allows the funding to last for about 30 years. To determine if you’ve reached this threshold, you simply need to multiply your desired retirement income by 25.

Another option, known as the replacement ratio, suggests dividing your estimated annual retirement income by your pre-retirement income. If you can hit a target of 70 or 80 percent, this calculation suggests, you’ll be able to retire.

While these calculations can provide a good reference point, they are not sufficient to account for factors like market volatility, lifestyle changes, or inflation. They also tend to be less accurate for longer lifespans, especially those involved in early retirements.

By meeting with a financial advisor, you’ll be able to carefully weigh all of the factors affecting your retirement planning and get a customized plan that meets your needs. To set up a meeting with a team member at Grey Ledge Advisors, contact us online or call 203-453-9075.