When Should You Retire?

A client told me that you retire when you’ve had enough or you have enough.  If you’ve had it with work, go ahead and quit; that’s easy.  Your peace of mind should not have a price.  However, deciding how much is enough is a tougher decision, because you need to decide, among other issues, what is more important for you: time or money?  After you hit sixty, you begin to recognize that life now is no longer infinite, as we all thought when we were younger.  So we need to start carefully assessing the tradeoff between time and money, because, as someone once told me, you can always make more money but you can never make more time.

Let’s illustrate this dilemma.  Suppose you value your time dearly, but you estimate that working one more year will add extra money to your retirement savings.  Is it worth working one more year to accumulate more?  For example, if I retired from the university now at 61 3/4, I would get a pension of $75,000.  But, if I wait one more year, my pension will go up by $4,000 per year for life, which is the equivalent (its present value) of an extra $45,000, if it were to be paid in a lump sum at retirement.  Should I wait one more year to retire, and therefore accumulate more, or quit early?  The price I’ll have to  pay for this extra $45,000 is one year less to have the total freedom to do what I really want to do.  Is it worth it? 

The decision of when to retire will also be influenced by how much we have saved, as well as by what we consider to be enough savings.  How much  we need to have saved is a tough question but, fortunately, it is one  I can answer.  That’s the purpose of my Retirement Income Strategy.

I believe you have enough when you can afford to maintain your current standard of living for life.  This means you should be able to enjoy an income equal to what you made, on average, your last few years of work.  However, there are a few caveats.  Let me explain: suppose you made $100,000 per year and you want to retire with the lifestyle that income provided.  What percent of your income do you need at retirement?  Let’s do the math.  Deduct the social security taxes and any contribution to the 401 (k) you were making.  Suppose these two added up to $20,000; then you’d really only need $80,000 at retirement. 

So far, it seems you only need 80% of what you were making, right?  Not really.  When you were working every day, you had something to do—and this activity took you away from spending money.  However, if you are retired, presumably you have lots of free time, so how will you keep yourself busy?  Playing golf? Travelling?  These activities cost money, and because you did not play golf and travel while you were working, you need to add the estimated cost of these activities to your retirement budget.  Suppose you want to spend $20,000 a year travelling and $15,000 playing golf.  How much income do you need at retirement? You will need the $80,000 we first calculated plus this extra $35,000 for a grand total of $115,000, which is 15% MORE than you were making while working.  Ouch!

Now that you have an idea of how to estimate the income you will need to maintain your lifestyle throughout retirement, more questions arise. For example, do you have enough money saved to produce the income you’ll need?  What rate of return do you need to earn on those savings?  Do you know how to invest that money so you can generate the needed cash flow?  At what rate should you withdraw income from your nest egg—so that you don’t deplete your capital prematurely? All these questions, and many more related to retirement, are answered in my seminar “How to Manage Your Finances During Retirement.” For dates and location, please visit my website at www.ulivi.com or contact me and I will send you the information.

And by the way . . . If you have a friend who needs help with their retirement or investment planning, please contact me. I will be happy to contact them and explain how I may help them maintain their lifestyle and financial security throughout retirement.