As you enter your early 40s, you may start to contemplate the age when you would like to retire. After years of only thinking about working hard and getting ahead, you might realize that you haven’t spent enough time planning for retirement.
It’s not too late to make sure you can retire on time. There is a process you should go through to determine if you’re investing wisely and saving enough for a comfortable retirement. Spend time closely analyzing your financial situation and how it could affect your retirement goals.
By planning for retirement now, you’ll likely put yourself in a much more comfortable financial situation once you’re able to stop working.
Here’s a three-step approach to determine the best age you can reasonably plan to retire.
#1. Look At Your Current Lifestyle
Your current lifestyle is the single greatest factor in determining your future retirement age. Start by looking at your current income, debt and expenses.
Are you spending everything you earn every month? Are you incurring debt? Living beyond your means makes it very difficult to enjoy a comfortable retirement.
Are you putting money into savings and investing in retirement accounts such as IRA and 401(k) accounts? Giving your retirement investments time to grow puts you in a much better financial position once you retire.
You also need to think about how you’d like to live once you retire. If you live in a large house now, are you prepared to downsize? If you enjoy traveling, do you plan to travel more or less frequently after retirement?
#2. Set Your Retirement Planning Financial Goals
Once you’ve taken a close look at your current lifestyle and thought about your ideal retirement lifestyle, sit down with a financial advisor to discuss your retirement goals.
It’s helpful to look at three different retirement ages and work backward to set different retirement goals by age. These three ages should include an early target age such as 55, a normal retirement age such as 62 and an optimal retirement age where you can reasonably expect to retire comfortably based on your financial situation.
Work with your financial advisor to do projections that take into consideration debt, growth rates, inflation and taxes. Then, evaluate what investments you need to replace your current income at these different retirement ages. Your investments are necessary to build a future income stream that replaces your current one.
Take into account other possible sources of future income as well. If you know you will have an inheritance, factor that into your projections. You might have other assets such as a business or a pension that should also be included in your future income projections.
Then, work with your financial advisor to evaluate what changes you should make to your investment portfolio to meet your retirement goals. Match each goal to an asset or retirement savings plan.
#3. Understand And Plan For The Impact Of Your Retirement
At this point, it’s important to make sure you fully understand and plan for the financial impact your retirement will have.
Account for how long you might live and how that should impact your withdrawal rate. While you may be hoping for a generous withdrawal rate of 5%, that might not be possible if you live well into your 90s. Even if it appears feasible, your financial situation may tighten significantly in your later years.
When planning for your retirement withdrawal rate, consider inflation. Rather than simply looking at current inflation rates and assuming they will hold steady, take a broader view. It’s more prudent to look at inflation trends over the last 15 to 20 years when conducting your retirement planning.
It’s still possible for you to achieve your goal of a comfortable retirement. No matter what age you plan to retire, the key is to get started with your financial planning for retirement as soon as possible.
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