Your determination of when to retire is important; the age you select will form the foundation of your life (and possibly career) plans, your retirement savings goals, and even the sorts of investments you should choose. However, few people understand how to determine when to retire. Luckily, figuring out when to retire is as easy as following these simple steps:
1. START WITH A GOAL: Start by determining when you would like to retire, specifically. Stating that you would like to retire in your 50s (or next year) is not specific enough to allow you to make the necessary plans to meet that objective. Instead, either choose a specific age at which you would like to retire (e.g. 55) or an event (e.g. two years as VP, two years after your youngest child graduates college).
2. CALCULATE HOW MUCH YOU NEED TO MAKE THAT HAPPEN: Next, you will need to calculate how much money you need to make that happen. Remember, you will need to include your yearly cost of living for the lifestyle you want (probably at least $20,000, assuming everything is paid off and you carry no debt), the new expenses you will likely encounter during retirement (e.g. increased healthcare costs, increased health insurance costs, more money for traveling), anticipated expenses (e.g. new furnace, new roof, new siding, new vehicle) you will experience during that time, and the cost of inflation on the whole.
3. TAKE AN HONEST ASSESSMENT: Now, take an honest assessment of where your savings and investments currently stand with relation to that number. Ask yourself if you will reach that goal at your current level of savings and with the current return on your investments, taking care not to be overly optimistic about returns.
4. FIGURE OUT THE GAP: Once you have determined how much you, personally, need to retire, and you have taken an honest assessment of where you currently stand in that regard, you can look at the difference and develop a plan to mitigate it. For example, if you are $400,000 short of what you need to retire, with your current contributions remaining constant and you have 20 years to retire, you will need to save (or earn as a return) an average $20,000 per year – a sum that could come from the purchase of a rental property.
5. DETERMINE FIT: Lastly, and subsequently, you will need to determine the fit of your investments to your retirement goals. Just as you would not put all your money in an IRA if your goal is to retire at 50 (you have to be 59½ to be able to take withdrawals from your IRA without penalty), you would not keep an investment that was not generating returns adequate enough to meet your savings goals. Spend time at least once a year revising your retirement plan and adjusting your investments as necessary, and possibly your target retirement date.
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