Should I Stay or Should I Go?

Recently in a social media group, a participant asked how one can tell whether it is time to leave their career and retire. While I have no data to back this up, my observation is that once you verbalize this question, the cat is out of the bag. It’s time to move on and deep inside (or not so much) you know it. The question really becomes, can I retire?

A good starting point is comparing your must-have spending to your guaranteed sources of income in retirement. Emphasis on the word guaranteed. For most, that just means Social Security but for others, pension income could be part of the story.

Turn to the must-have spending ledger, which means housing, food, transportation, debt service, and current out-of-pocket medical costs. If you are contemplating a pre-65 years old retirement, include the cost of health insurance. If you are already 65 and will rely on traditional Medicare Part B, get a quote for Medigap, otherwise known as Supplemental Medicare insurance. If there is a gap between guaranteed income and guaranteed spending, then we turn our eye to savings.

The well-trod “4% Rule” is a good starting point. No, this is not — I repeat, not — an exact prescription for how you will draw down your savings in retirement. But it does tell us in a general way if your savings are in the ballpark of being sufficient to meet your needs. To review very quickly, if you have $1 million in retirement savings at the onset of retirement, that translates to a $40,000 income stream in your first year of retirement.

At this point, your Social Security benefit, pension (if you have it), projected income stream from retirement savings and any other source (such as rental income), need to not just match your must-have spending, but exceed it comfortably. That margin of difference is the key to whether you will enjoy your retirement or possibly be miserable. If this surplus does not exist, then you are not yet ready to retire no matter how much your heart begs for it to be so.

But still…Maybe you could spend less? Maybe you don’t really mean retire retire; you could work part-time. Let’s explore these options, shall we?

It is conventional to assume for planning purposes that your spending in retirement will be about 80% of your current working-life expenditure. But the reality likely looks a bit different. Tis true that some expenses fall away (such as your contribution to your retirement savings, or even your mortgage), but others have a way of taking their place. This might be increased travel in the early years of retirement, and medical costs in the later years. You do you, but absent specific evidence to the contrary, I usually assume that spending in retirement will not look a whole lot different in aggregate than spending in the years leading up to it. (And I have not even touched on the need to plan for the possible cost of long term care!)

Will working in retirement be part of your plan to close the gap? Obviously, this is a plan that may have a relatively short shelf life. A good idea at age 67 is likely less good when you are 77. Also, consider this: According to the Employee Benefit Research Institute, 75% of not-yet-retired respondents said that they plan to work for pay in retirement. But only 30% of retirees report that they actually do. If working in retirement is your plan, take a beat to consider if this is a realistic strategy over any appreciable length of time.

So, what to do? Continuing to work full-time is an obvious solution. For example, if you planned to retire at age 65 with a reduced Social Security benefit, then will hanging on to your full retirement age be enough to close the gap? Or age 70 when Social Security benefits peak? (If you are married, consider what your retirement lifestyle will look like when, as is inevitable one day, there is only one Social Security check.) Again, though, I point to the aforementioned research on just this question: While the median age that people say they want to retire is 65, the actual median retirement age is just 62. Almost a quarter of survey respondents say that plan to work until age 70 (or even beyond); in reality, only 6% do.

The bottom line is that there is no great substitute for what you already know to be true: save, save, and then save some more. This is no less true in the few years just ahead of retirement than it was earlier in your career. Or to state it another way, increasing your savings rate even in the run-up to retirement is still a good idea because there is simply no other reliable alternative.

I won’t leave you on this sour note! Because the research also tells us this:

“Nearly four in five retirees agree they are able to spend money how they want. Almost seven in ten believe they are having the retirement lifestyle they envisioned.”

Somehow, some way, we make it work.

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