The idea of retirement can be both exhilarating and terrifying. There's the excitement of being able to lead a more relaxed life after so many years in the workforce, but having sufficient funds available for a comfortable retirement can cause a lot of anxiety and worry.
How much do you need to have in the bank, and what strategies should you have in place? Learn more about the factors you need to consider when deciding when to retire.
When should you retire?
The question of when to retire might be at the top of your mind when it comes to planning for your retirement. After all, it can be difficult to be confident that your savings will be able to see you through the duration of your retirement.
The following tips, however, should help you deal with selecting a date even though so much about the future remains uncertain.
- Put serious thought into your planned retirement lifestyle. It's important to assess the kind of retirement lifestyle you want. While having adequate savings is obviously the main goal for retirement, it's impossible to determine whether your savings will be adequate if you don't know where and how you plan to live after you retire. According to Amit Chopra, Certified Financial Planner and founder of Forefront Wealth Planning & Asset Management, it's important to think about these considerations well in advance so that you can tailor your financial plan around your answers.
- Think about your retirement spending in terms of a withdrawal rate. One important factor to consider when determining a good time to retire is how much you plan to spend during retirement. Financial advisor and finance professor Brandon Renfro suggests the "4% rule" as a good starting point when you're trying to settle on the right retirement date. "Once you determine the withdrawal rate that makes sense for you," he says, "do some backward planning to figure out the amount you need to have saved. For example, if you're using the 4% rule, and you plan to spend $40,000 from savings each year, a 4% withdrawal rate would mean you need to have a million dollars saved."
- Have a system in place to help you deal with potential market volatility. Renfro also advises having a system in place to deal with market volatility, such as going with a variable withdrawal rate. "With a variable withdrawal rate, you'll adjust your withdrawal up or down slightly, with the market," he says. "This will help relieve some pressure when the markets dip and can really increase the likelihood that your money lasts throughout retirement. Having the strategy clearly defined in advance is important. You don't want to make it up in the moment when you are stressed or anxious about the market."
- Consider other variables, such as health benefits. While how much you have put away for retirement will be the most important factor when it comes to knowing when is the right time to retire, there are other factors you should also consider. Chopra notes that healthcare plays a significant role for many of his clients. "It's a concern for my own retirement planning," he says. "My wife is a New Jersey state employee, and consideration for her health benefits are already worked into our plan during retirement, but she needs to work for a required amount of time in order for those benefits to vest."
- Be flexible once you've chosen a retirement date. How the markets are doing when you retire can trigger an effect known as the sequence of return risk. Renfro points out that retiring during a poor market has a substantially greater negative impact on your ability to live off of your savings, leaving your portfolio struggling to keep up. His suggestion? "If the market tanks right as you are getting ready to retire, you could substantially improve your retirement by waiting for a rebound."
Enjoy your retirement
Renfro notes that being retired doesn't have to mean you need to abruptly stop working, either. A hobby job or part-time employment can be particularly rewarding in non-financial ways. "Of course, the continued income is helpful too, but mental wellbeing is an important element of a happy retirement," he says. "Many retirees struggle with the sudden change, and staying engaged could help you enjoy retirement much more."
Chopra agrees it's important to enjoy your retirement. Whatever the ideal retirement life looks like for you, enjoy it. "I remember my clients thinking I would 'scold' them for taking money to go on a much-desired vacation," he says. "Absolutely not! I love when my clients use what they have worked so hard to amass. Having young children, I have a keen understanding [of] how difficult building wealth truly is. Watching my clients enjoy what they have worked hard for is more rewarding than I ever thought it would be."
Picking an ideal retirement date can be a challenge—after all, it's difficult to be completely certain about what will happen in your future years. But by putting thought right now into what you want your retirement to look like and the funds you need to sustain your desired retirement lifestyle, you can more confidently work toward a retirement date that will realistically work for you.