Am I financially prepared for retirement? This is a question that I will be asking myself regularly until I eventually decide to stop working to make a living. I have to believe that other baby boomers are asking the same question.
You know you can retire when ….
1. You won’t run out of money until age 95. This is the basic quandary of money and longevity. Some folks rationalize spending with “I have to enjoy life now because I won’t live forever.” If you live to 95 and your money gives out at 85, that last ten years may seem like “forever.” (Here are some resources on life expectancy.)
2. You can wait for Social Security. Much has been written here and elsewhere about the best age to claim Social Security retirement benefits and the downside of claiming before full retirement age. Being in a position to wait means that you can implement the economic concept of “consumption smoothing.” Basically, this concept may cause you to spend more of your nest egg early if necessary to claim Social Security later.
3. You own your home. Living in a mortgage-free home can solve so many different financial problems for retirees. Here are some resources to consider whether you should have a mortgage in retirement. We are mortgage-free with our vacation home (which we will use as a part-time retirement residence) and are moving in that direction for our condo purchase.
4. At least 40% of your income is guaranteed. I actually think this percentage should be a lot higher – 100% actually – for your basic retirement income needs. That’s why I am working on our own plan for guaranteed retirement income. If you have your basic needs met with a pension and/or Social Security, that’s fantastic.
5. You can cut one-fifth of your spending in hard times. I suppose this means that 20% of your spending is 100% discretionary. Perhaps more important is that it means that you are willing to make those cuts when the need arises. Too many people are too proud, too stubborn, or are in denial and wait until it’s too late to make needed cuts. Can’t do that when the income is fixed and the nest egg is shrinking faster than anticipated.
As I said, I appreciate the value of this list. I plan on re-visiting it regularly when evaluating our own retirement readiness.
What about you? Are you looking for signs of being prepared for retirement? What are they?