“Do I have enough money to retire?” is a question that is asked many times every day by people who are approaching or have reached retirement age.
This generation known as baby boomers has always charted an original course. While baby boomers have grown to become leaders of industry, published scientists and scholars, brilliant artists, musicians and athletes, they have not been renowned for their financial conservatism.
Baby boomers grew up in the prosperous years when the world had recovered from the second World War, and didn’t know a depression like the previous generation. A lifetime of spending big and saving small can be fun, eventful and adventurous, but doesn’t exactly set you up well for retirement.
Whether you just started saving last year or have been putting money aside as your ‘nest egg’ for decades, you must have a plan in place you can execute consistently.
Consider your actual living expenses after retirement
Any realistic plan must start with a rock solid budget. You’ve got to take the time to estimate your expenses during retirement, as well as the income you expect to cover those expenses. Start off by tracking your expenses as they stand now, and do that for a couple of months so you can come up with a comfortable average. Make sure that you add in money that would cover at least six months of expenses as well, so you have an emergency fund you can draw from. This is your pre-retirement budget. To adjust it for your overall plan, remove the expenses that will change upon retirement (such as commuting costs) and trim down your income to what you expect during those years as well.
Once you know how much you’ll need to keep your household going from month to month you can find out if you might be eligible for any government assistance. You’ll also be able to find out how much you’ll be able to draw from any investment accounts or your superannuation. This will give you a very clear idea of whether you have enough money to retire.
You’ll need to be aware that working after retirement could actually push you into a higher tax bracket, which might alter the amount of money you have to live on each month. Determine what your tax liability will be, including Social Security and any other income you may have, then determine how continuing to work will impact that liability.
Understand your Social Security eligibility
There are a couple of factors to be taken into account when determining whether or not working after retirement is going to impact your Social Security. It will be impacted by the age at which you retire and your income from work. If you decided to wait until you had reached full retirement age you can earn any amount without reducing your benefits. On the other hand if you retired anytime between the age of 62 and your full retirement age, you can be penalized financially for earning more than around $15,000.
By researching the full retirement age for yourself you can discover the cap on your income. If you exceed that cap for a full year your Social Security payments will be reduced by $1 for every $2 you go over, and if it will be less than a year you will lose $1 for every $3, but the income limit is significantly higher. Use government resources to be sure that you are being given the most accurate information.
Research how working in retirement will impact your pension
If you have a pension you’ll want to speak with the administrator of that plan to understand what effect working in retirement will have on it. While continuing to work can reduce the amount of time you’ll spend draining these funds and even increase them with added contributions, some pension plans max out at 30 years and continuing to work could lead it to stagnate or even to be reduced. On the other hand, some pensions are based on your most recent salary with the company. If you decide to drop down to part time with the same employer to supplement your income, a large portion of your pension could disappear.
Manage expenses
It is wise to cut out some of the long-term bills you face now, so you won’t have to include them in your retirement budget. Always pay off any credit card debt before you stop working, as it will only get harder when you are retired. More and more older people are facing bankruptcy these days, and the primary culprit is credit card debt. And if you own a home, do your best to pay off your mortgage before you retire as well. With those two major expenses off the books you’ll have a much better chance of enjoying your retirement comfortably and will feel confident that you have enough money to retire.
Medical expenses
The other big issue you should check off as early as possible is how you will handle medical expenses. This is one budget area that nearly always increases as you age, and you cannot control the outcome or the size of the bills. Many retirees have medical insurance, but even that isn’t always enough to cover all issues. Health problems can eat through your savings in a hurry, so learn everything you can about your options. And consider setting aside money specifically for healthcare costs. There are specific savings accounts for these issues, as well as separate insurance policies to cover the expenses of long-term care should you need it.
Calculate if you do have enough money to retire
ASIC provides some very helpful retirement planning calculators to help you work out whether you do have enough money for retirement. They have an
- Super Calculator – How much superannuation are you likely to get when you finish work?
- Retirement Planner – Do you have enough money to retire and what can impact that?
- Super Contributions Optimisation Calculator – What sort of payments will boost your super the most?
- Account-based Pension Calculator – How long is your pension likely to last?
- Super and Pension – When can you get your superannuation and apply for a pension?
- Superannuation vs Home Mortgage – Should you contribute more to super or pay off your home?
With all those numbers in front of you in black and white you are either ready to celebrate your frugality or suffer a panic attack. You may need to adjust your retirement expectations at this point. Review your timing for when you would like to retire, and tweak it if necessary. You may need to work longer than you expected, but that’s not always a bad thing. If many of us are going to live to a ripe old age do you really want to face 30 years of not working?
Retirement expectations
Consider what you really want from those possible 30+ years and design the lifestyle that you really want. This does not have to mean blowing the budget and suddenly living like a millionaire for a year or two, then a pauper for the rest of your life! Think about what you really want from life, then start a plan to include as much as possible of those things in the life you will love. Use our Retirement Planning Guide to help you design a life that you will love.
Plan an income producing retirement doing something you enjoy
If you’re considering retirement, deciding whether or not you’ll need to keep working can be a difficult and confusing question. An increasing number of retirees take this opportunity to unleash their entrepreneurial interests. One of the best advantages of working in retirement is the fact that money can be a secondary goal. If you’ve planned and invested well, and if you live within your fixed means, you can choose to do something that you find interested, fulfilling, or fun, and worry less about how much it will contribute to your income. Of course your new business may also be extremely lucrative.
Some people find ways to work from home, some work as consultants in their former industry, working to shape it for the better. If your business is going to take a while to turn a profit you need to be very sure that you have enough money to retire comfortably whilst incurring the business expenses.
Do the things that make you happy
Lots of people travel, a little or a lot, when they retire. Perhaps you are a grey nomad at heart, or want to visit the places and do the things on your Bucket List. Perhaps you want to write a book, research their family history or give back to your community as a volunteer. The most important thing to remember is that you now have the luxury of choosing how to spend your time, so why not spend it doing something that makes you happy.
Be prepared psychologically
Finally, make sure you are emotionally prepared for what’s to come. It’s weird because you know the transition that is coming up, but when it happens many people feel very unprepared for their new life. Feeling worried about whether you have enough money to do the things you want to do after you retire is a common emotion. It’s quite normal to feel discombobulated and as if your identity has changed. Many people mess around in this head space for a couple of years, not actually doing all the things they thought they’d do in retirement; not doing much as all really. Others react differently and life becomes one big holiday….but the reality is the overseas jaunts and the Grey Nomad lifestyle usually can’t last forever. When you get back to the ‘real world’ you need to be ready to create a new fulfilling sustainable life.
Just as you may need an accountant to help you understand the financial implications of retirement, a few conversations with a retirement coach could help you determine if you are ready for retirement. You don’t want to take on such a big change too early, or without thinking it through. It’s a whole new life, and you don’t want to make decisions that impact your emotional health and your financial health in negative ways.
Use our Retirement Planning Guide to help you design a life that you will love
Retirement Savings Goals
Do you have the retirement savings that you had hoped for or expected to have by now? Daniel Goldstein’s TED talk considers what we need to do to achieve our goals when that involves a battle between your present self and your future self.
According to the McKinsey Global Institute two out of three baby boomers will not be able to meet their anticipated retirement needs when the time comes. He specifically speaks about retirement savings, and uses some very interesting virtual reality tools to give emotional strength to the need for current action to meet future needs.
