Many workers look forward to retirement and the new changes and opportunities it brings; but, some might struggle to determine when they are ready to retire. There’s no exact science or magic number to determine the right time to retire. Instead, attention to retirement savings and creating a plan for what to do during retirement may help you better understand when you are both financially and emotionally ready for retirement.
Financial Retirement Readiness
According to a 2018 study of over 2,000 working Americans ages 40-70, about one-fifth of respondents were financially unprepared for retirement.(1) While many retirees rely on Social Security benefits to help fill savings gaps, currently, Social Security benefits only cover approximately 40 percent of an average worker’s pre-retirement income.(2) In addition to personal savings and Social Security benefits, other sources to supplement retirement income include individual retirement arrangements (IRAs), employer-sponsored retirement plans (401(k) plans, pensions, profit sharing plans, etc.) and fixed indexed annuities.
Everyone has different financial needs in retirement. When considering whether you are ready to retire, evaluate your financial strength to see if you are in a position to stop working. A retirement calculator can help you establish a retirement savings goal by comparing your income and current savings with your age and anticipated expenses. Various retirement calculators are available online, free of charge.
An additional way to help gauge financial readiness is to examine how retirement costs will affect your nest egg. Some retirement costs to consider may include:
*Extra expenses, such as traveling
According to the Bureau of Labor Statistics data, older households typically spend an average of $49,279 a year on living expenses, including food, housing, clothing, transportation, healthcare and entertainment.(3) Having a plan in place for how to pay for expenses may help you feel more confident in your decision to retire.
Emotional Retirement Readiness
While meeting financial goals is an important part of retirement planning, an often forgotten aspect is emotional readiness. For many, working provides a sense of validation, in addition to other psychological benefits, such as a daily structure and social interaction. Because of that, retiring may present a sense of loss for some and be a risk for depression.(4) Retirement is a major change, with emotional implications, that shouldn’t be done on a whim. Consider creating a list of your goals for retirement. Do you want to travel? Spend more time with your grandkids? Start a new hobby? Work part time? Move to a new city? After you’ve established your goals, create a plan to achieve those goals.
Here are some other ways to better prepare for the emotional side of retiring:
*Create a plan for how you will spend your days in retirement
*Establish a retirement bucket list
*Find or create an emotional support system of friends and family
*Pursue a new hobby or consider a part-time job as a bridge from working to full retirement(4)
Deciding when to retire can be a complex decision with many factors contributing to retirement readiness. Ultimately, the only person who truly knows when you are ready to retire is you. Paying attention to both financial and emotional milestones and defining retirement goals can all help you in making the decision to retire.
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Footnote 1 Indexed Annuity Leadership Council, “The State of America’s Workforce: The Reality of Retirement Readiness” 2018↩
Footnote 2 Social Security Administration, “Learn About Social Security Programs” ↩
Footnote 3 Bureau of Labor and Statistics, “A Closer Look at Spending Patterns of Older Americans” 2016↩
Footnote 4 US News and World Report, “Can Retirement Be a Depression Risk?” 2017