When Can I Afford to Retire?

To plan for retirement, start by boiling the question down to basics. You can afford to retire when your sources of income, and your investments, will provide enough cash to support the lifestyle that you choose during your retirement.

Step 1. Your Retirement Lifestyle

The first step is for you to determine the lifestyle that you want. For many of us, that lifestyle may require fewer expenses than those that we incur while working. Envision your retirement… you finally have a chance to do the things that you always wanted, but never had the time to do.

  • What will a typical weekday look like?
  • How about a typical weekend?
  • Will you travel more, spend more time on your hobbies, volunteer at a local community center, or perhaps start a new part-time job?

Carefully compare the expenses you now have with those you will have during your perfect retirement. Many folks feel they can accomplish everything they desire with about 70% of the expenses they incur while working. Some of the obvious reductions are costs of commuting, specialized clothing, and health expenses. Think carefully about how your expenses will change during your retirement.

Step 2. Financial Inflows

The second step is to determine if your financial inflows are great enough to support these expenses. Review the latest statement from the Social Security Administration to determine your estimated benefits. Although you may begin to receive Social Security benefits at age 62, you will receive an additional 8% for each year that you delay. For some of us, it makes sense to delay to age 70, the age beyond which benefits no longer increase. Then, do you have any pensions, or rental income? Do you anticipate any inheritance?


Now, determine the size of your “nest egg”, your retirement savings. These savings can usually be invested to provide a steady stream of income which, in conjunction with the items mentioned above, will determine the lifestyle that you can afford. To be on the safe side, a 65 year old should not plan on spending more than 5% of their savings each year during retirement. Although that figure may seem low, it is necessary to ensure that your retirement savings will not be depleted while you are still alive.

[box type=”” size=”medium” style=”rounded” border=”full”]A 65-year-old should not spend more than 5% of their savings each year during retirement.[/box]

Step 3. Financial Outflows

The third step is to compare the inflows with the outflows, and to adjust. Most of us will initially choose a lifestyle whose costs will exceed the cash that we will have available. Now the tough job:

  • Where can we cut back, and/or how can we generate more income?
  • Can we save more while we are still working?
  • Are we in a position to get a higher paying job?
  • Should we consider moving to a lower-cost area during our retirement?

Financial Plan

You can do most of this analysis on your own, using the traditional “yellow pad” approach. However, if you want to really zero in on the lifestyle goals that you can afford during retirement, you should consider a written Financial Plan.

A Financial Plan will make it easier for you to determine which of your retirement goals are most important, it will take into account how inflation will affect your expenses and investments, and how income taxes will reduce the amount of cash you have available. A Plan will also make it easier for you to structure an investment portfolio that is most in tune with your need for growth, while taking into account your feelings about risk.

Make sure you work with a CERTIFIED FINANCIAL PLANNER™ as you plan for retirement. That way, any recommendation that you receive will be in your best interest.