When Can I Retire? - A Step By Step Guide To Calculating Retirement Age
Understanding when you can retire is about more than just calculating when your savings will run out: it’s about your goals. Knowing why you want to retire and what you plan to do in your retirement are crucial steps in estimating your retirement age.
Before being able to know when you should retire, you have to ask yourself “what will I be doing after I retire?”
That is what is a question that will provide you with a true understanding of when you can hang up your day job and move on to the next stage in your life!
To understand when you can retire, you need to do three key things: Understand why you want to retire, calculate your expenses in retirement with these goals in mind, and take account of your savings or other sources of income in retirement.
All of these steps relate very closely to one another and you’ll see exactly why as you read this article. By the end, you will be able to calculate when you can retire and recognize whether you should retire at all.
Find out why you want to retire
What you plan to do while you’re retired has a big impact on when you can retire. Establishing the type of lifestyle you want after you leave your job is arguably the most important factor in determining if you’re ready to retire.
Do you want to start a business? Do you want to travel the world? Do you want to start restoring classic cars? Do you have plans to move to a sunnier state?
All of these goals are typical of soon to be retirees who will eventually have a lot of much deserved free time on their hands, but they also come with unforeseen expenses.
Let’s say you want to travel the world. How many trips do you plan on taking in an average year? How much does air fair cost (will you fly economy, business, or first-class)? What kinds of travel insurances will you need?
Will you still be paying a mortgage or will you be selling your home? Will you sell your car to travel abroad or will you buy an RV to road trip across the Americas before you decide to travel overseas?
We know that you’ve spent countless hours daydreaming about your life after you retire, we know how much thinking about the associated dollar signs can kill the mood.
It is imperative that take a considerable amount of time to contemplate what your goals will cost you before you make the decision to retire.
Doing this will give you the confidence you need to enter retirement without worrying about running out of money too soon.
Calculate expenses in retirement
Now it’s time to take account of what retiring will cost you. We know that this is the boring part, but no one says that it has to be!
Grab a pen, some paper, and even bring your spouse or family member along on your planning journey! This is a time to make your dreams tangible so why not enjoy the ride!
We’ll give you simple steps that you can use to estimate your expenses in retirement. These steps will help you calculate the following:
Fixed Costs (mortgage, insurances, car payment, etc.)
Variable Costs (food, personal care, entertainment, activities, etc.)
Goal specific costs
Step 1 - Write a list of everything that you pay for regularly.
If you receive a bill for it in the mail that does not change from period to period, it is likely a fixed cost.
Examples of fixed costs include mortgages, utility bills, car payments, rent, other loan payments, and insurances.
Step 2 - Go through your most recent statements for your fixed cost items and write down their associated costs
Step 3 - Write a list of every variable cost that you have in an average month
This list should include any expense that is not a fixed cost. Examples of these expenses are gas, books, hobbies, activities for your children, etc.
Even if you spend money on these items on a regular basis, they are still considered variable because you ultimately control how much you spend.
A mortgage is fixed because no matter how you move your budget around, you will still owe a specific dollar amount each month. Your clothing budget, on the other hand, can be changed as you see fit.
Even something like your daughter’s summer camp fits under variable costs as you can decide if you will spend money on it.
You can choose to take your daughter out of summer camp but you can’t choose to skip next months mortgage payment (at least without jeopardizing your quintessential need for a roof over your head).
Fixed costs tend to be essential to your livelihood, while variable costs are typically lifestyle choices.
Step 4 - Go through your most recent bank statement and calculate how much you spend on each variable cost item.
If your spending last month was irregular, then we would recommend taking an average of your spending on each category over the last 3 months.
Do this by seeing how much you spend on an activity in each month, add these amounts, and divide the total by 3.
Do not overlook high spending months. Many people have the tendency to do this! Leaving out months that you spend irregularly will give you an inaccurate idea of your spending habits.
Step 5 - Add your fixed and variable costs
This total is what your expenses are currently. This number is important because it will show you what your expenses will be in retirement if you want to keep the same lifestyle.
Any good retirement strategy should plan, at bare minimum, for a retirement where you will be living as you do now.
You may be able to retire earlier, but you will likely have to make lifestyle sacrifices to do so. We’re going to show you how to calculate this in a later step, bear with us!
Step 6 - Calculate expenses related to your retirement goals
This is where it gets fun!
Repeat steps 1 through 5 but only include expenses that are associated with your goals, not your current expenses. These are things that you do not currently pay for that you would like to be able to in retirement.
Example 1: You want to buy a vacation home in California. Estimate your monthly mortgage payment, utility bills, and insurance cost. Estimate your variable costs associated with the home including transportation, entertainment, and maybe a dog sitter if you’re leaving your furry friend behind while you enjoy your surroundings.
Do not subtract anything yet. If you want to get a new luxury car when you retire add those expenses to this section but do not remove your old car from your expenses.
Finding out what you can spend less on comes at a later step.
When you’re done listing your fixed and variable costs for your goals. Add them up to see how much your goals will cost you on a monthly or yearly basis.
Step 7 - Add your total current expenses and total goal expenses (the total sum of steps 5 and 6)
This number will tell you how much you will be spending in retirement if you don’t downgrade your lifestyle and attain your goals. This should be your ultimate goal.
It’s kind of like having your cake and eating it too!
If you want to know when you should retire, the answer is when you can afford to keep your current lifestyle and still achieve your goals.
Now to find out if you are currently at a point in your life when you should retire we’ll have to take a look at your retirement income.
Take account of retirement savings and calculate income
Step 1 - Add your information to the calculator
Enter the following fields
Current age
Age at retirement (when you want to retire)
Annual household income
Percent of income to save (what you’re saving now)
Current retirement savings
Expected income increase (the 2019 average pay increase is 3%)
Years of retirement income (the difference between your life expectancy and your age at retirement)
If you plan on collecting social security, click the “Investment returns, inflation, and social security” drop-down menu and select “include social security”
If you’re married check that box as well
Step 2 - Hit calculate
You will now be able to see when your retirement savings will run out, how much you will have saved by the time you retire, how much your annual retirement expenses will be, and how much income you will receive from social security.
Step 3 - Factor in your expenses
Move the “Pre-retirement income desired in retirement” slider to make your retirement expenses in the equal your estimated expenses that we calculated in step 7 of the previous section
Example: Your current and goal-related annual expenses are $60,000. Move the slider until your retirement expenses in the calculator are nearly equal to $60,000. (You can find the annual retirement expenses in the area near the graph. It will change as you manipulate the slider)
Step 4 - Review the results
How long will your money last? If you have a balance at the end of retirement then you have enough money to retire while upgrading your lifestyle to include your goals.
You should now be able to clearly see when you’ll run out of money based on the age that you wanted to retire.
If you’ve run out of savings before your full retirement term then it’s time to return to the drawing board.
Step 5 - Making the numbers work
Adjust the “pre-retirement income desired in retirement” slider so until your balance at the end of retirement is greater than $0.
This will show you how much you can spend annually in retirement and not run out of money. If the expenses in the calculator are lower than the ones that you calculated on paper, it’s time to return to the drawing board.
This is where you can revisit your current expenses and see what you can live without.
Now you should focus thinking about how you can change your lifestyle in retirement to allow you to accomplish your goals.
Maybe you can sell your old car which will decrease your annual expenses by $4,000. What if you sold your family home and moved into an apartment to afford your dream vacation home? This could hypothetically save you $10,000 per year.
You don’t want to modify the costs associated with your goals since that is what you have always dreamed of. These should be the last expenses to change.
You can even change your “age at retirement” to see when you can retire if your desired age doesn’t allow for your savings to last.
Maybe if you retire at 70 instead of 60, you won’t have to focus on decreasing your expenses as much as you would have if you had retired early!
Retiring early generally means that you will have to spend less money each year to make your savings last throughout retirement.
This could mean that you get to retire relatively young, but is it worth losing out on part of the lifestyle you want to do it? That is a decision that only you can make!
Playing with these numbers will give you a clear idea of when you can retire, how long your money will last if you retire at that age, and how much you will be spending in retirement to achieve your goals!
Conclusion
When you can retire depends on several factors including what you plan on doing in retirement, if your lifestyle will change in your golden years, and how much you’ve saved.
By following these steps you should have a good idea of when you can retire while achieving your lifelong goals.
Additionally, you will be able to tell what you will need to change to have the lifestyle you want in retirement.
Of course, this is a rough calculation. You will have to speak with a financial professional to get an exact age at which you can safely retire.
We’re more than willing to give you a plan that you need to feel confident about your retirement age. If you’re worried about your retirement schedule a free consultation with us!
Let us help you alleviate your retirement-related stress with no-strings-attached. We’ve got your back!
Written by Magdalena Johndrow
Maggie is a Partner and Financial Advisor at Johndrow Wealth Management. She attended Providence College and the London School of Economics prior to beginning her career on Wall Street at Barclays and JP Morgan. She has taken her experience with high net-worth clients and used it to empower families and small businesses.
