Can I Retire Yet? Here's How to Find Out

“Can I retire yet?” is one of the most popular questions that financial advisors receive from clients. And while the answer isn’t always clear cut, you can make some educated guesses based on the size of your nest-egg, social security income, tax bracket, and living expenses.

One of the most important factors needed to gauge whether you can afford to retire is your cost of living. If you live like a king and have daily expenditures to match, you will need a treasure chest of savings to keep your standard of living similar during retirement years.

On the other hand, if you live comfortably or below your means, it may be possible to hang up the work boots and hit the beach with less savings.

But before you buy the sunscreen and beach umbrella, let’s see what the most important factors are that you need to consider.

Why You Don’t Need A “Can I Retire Calculator”

You don’t need a retirement calculator to get a ballpark estimate of whether you can afford to retire now. But you will need to be able to closely approximate your daily spending habits to figure out how much money goes out the door each year.

Rather than sitting down on a Sunday afternoon with a pen and pencil, check out Personal Capital, LearnVest or Mint, which have excellent budgeting tools that can quickly, automatically, and freely identify how much you spend and where your money is allocated.

Once you have identified how much you spend each year in total, you will have a better idea of how much income you need to earn to be able to retire.

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One factor you should not underestimate is how much extra time you will have on your hands when you decide to close the door behind you on your professional career. With more time on your hands, you may be more likely to spend more and so you should budget accordingly.

When you look over your shoulder at your past career, most of your waking hours were probably spent earning income but, when you retire, most of your time may be allocated to enjoying the fruits of your labors, which cost money.

Can I Retire Early? Get Paid A Fixed-Income

Once you have a good handle on how much you spend each year, you can make a better estimate of whether you can retire early.

The simple way to answer the question “when can I retire?” is to start by calculating your estimated annual income streams after quitting your job.

Start by jotting down how much you have in savings and investments.

Let’s say your combined nest-egg is $800,000. As a retiree, you won’t be rolling the dice in Vegas or even the stock market.

As much fun as it was to bet the farm on Facebook, Alphabet, or Amazon in your younger years, so too is it generally regarded as irresponsible to be heavily invested in equities during retirement years.

At many brokerage firms like TD Ameritrade and Schwab, you can buy government bonds, municipal bonds, and corporate bonds for income.

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Well renowned companies like Apple, Comcast, Disney, and others pay an annual yield when you purchase corporate bonds. It is not uncommon to find annual yields in the 4 → 5% range on good quality A-rated corporate debt.

While interest rates remained low for many years following the 2008-9 stock market crash, Fed rate hikes inevitably occur from one decade to the next, which is a good thing when you are retiring.

You want to earn higher yields from your savings. And if we assume that you could earn about 5% annually on average on your nest-egg of $800,000 that would translate to $40,000 per year in gross income.

If you discover that this $40,000 per year is insufficient to cover your living expenses calculated earlier, fear not because another income stream may be able to help pay the bills.

When Can I Retire? Social Security Can Help

You may be wondering after calculating your costs and income from savings “can I retire now?” and feeling a little a disappointed if your income falls short of covering your costs.

But don’t fret yet because you may have other income streams that you can tap.

The most obvious is social security income. If you are aged 62, you can start drawing on social security.

However, keep in mind that you will not be able to draw the maximum amount of social security at this age, and you will be locked into the lower amount if you choose it.

If you can hang on until age 70 before taking social security, you will receive the maximum benefit.