How to Know If You're Financially Ready for Retirement

Couple on a misty beach looking out at the ocean

If you have been asking yourself "When can I retire?" then you are not alone. Identifying the right time to retire is not only a common problem, it is also an important issue to consider, as there is no one-size-fits-all solution. Ultimately, an evaluation comes down to assessing your long-term financial needs alongside your ability to continue working. To make that big-picture evaluation, there are a few specific things to look at:

The restrictions on retirement accounts

IRA, 401K, and other retirement plans often have restrictions on how and when the funds become available to either spend or reinvest. While it is often possible to borrow against or simply take money from such accounts prior to retirement, specific provisions and regulations for various account types can impact everything from how they are taxed to what portion of the funds are available at a given time.

It is vital to understand exactly how your retirement accounts work, and talking to a wealth manager specializing in retirement planning is often essential in this process.

The risk associated with Social Security

There are a lot of options out there for optimizing your Social Security income relative to your needs. A retirement planner can help you navigate that situation. What we want to emphasize here is that Social Security is something you should avoid becoming over-reliant on. You never know when government policies may change or if a sudden wave of inflation may make your income inadequate. Be sure to plan for options beyond Social Security to keep yourself financially afloat, especially as you assess your readiness for retirement.

The long-term cost of living

There are things you can do to control your cost of living. A willingness to move or downsize, for example, can give you some control. Some couples even decide to retire in a foreign country to reduce living expenses.

To figure out if you are ready to retire, you need to project your budget in light of your future goals. Consider how your costs for housing and health care, in particular, could change as you age. Health care is especially important as you will need to consider potentially high costs until you can receive Medicare benefits. Be realistic and avoid overly optimistic ideas that you will have the ability to cut huge lifestyle expenses out of your budget. You will likely want some freedom to travel and have fun once you have retired.

The likely income of investments

If you have been saving for retirement, then once you retire your investment incomes will likely be your primary form of positive cash flow. Once your retirement accounts have stopped aging, you can move those funds into investments that yield annual returns, letting you live off of the money they generate. For example, if you have a million dollars invested at the time of retirement, and can, very conservatively, expect to make an average annual income of 5% on the investment, then that would generate $50,000 per year. In some years you may make more, in others you may make less.

Evaluating retirement readiness is often a matter of projecting the likely income from investments and Social Security alongside your costs and savings goals to ensure you are positioned to maintain the lifestyle you hope to pursue. As your new sources of income can create some risk of year-to-year income fluctuation, you will want to build some buffer into your plans or at least ensure that you are positioned to meet minimal expenses.

At Comerica Bank our teams can work with you to help you manage your everyday finances and long-term plans in tandem to move into the future with as much security as possible.

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, compliance or accounting advice. You should consult your own tax, legal, compliance and accounting advisors before engaging in any transaction.

Comerica Bank Access Checking Sign Up

Related Content