Except for the lucky few who have jobs that they absolutely love, it’s probably fair to assume that most people don’t want to keep working any longer than necessary. However, being mentally and emotionally ready to retire and being financially ready to do so aren’t exactly the same thing. Unfortunately, as much as you might want to stop working before you’re financially prepared, it could put you in a challenging economic situation down the road.
So if you feel like you’re nearing the end of your career and starting to daydream about retirement, how can you determine whether your financial status aligns with your goals? Consulting a financial advisor is always a good idea, but you can also take stock of how prepared you are for retirement by examining how many of the following points apply to you.
1. You’ve reached full retirement age.
Also known as normal retirement age, full retirement age is the age at which you are eligible for full retirement benefits when you stop working. For example, in the US, if you were born after 1959, you’ll hit full retirement age at 67. If you were born between 1943 and 1954, then your full retirement age is 66. While it’s possible to start claiming Social Security benefits as early as 62 years of age, it’s important to note that this will lower the amount of the monthly benefit you receive by 30%, a big reduction that not everyone can afford. (On the other hand, if you wait to claim Social Security benefits until you’re 70, you’ll be eligible for 132% of the monthly payment you would have received at full retirement age.)
2. You’re debt-free.
Whittling down most or all of your debt is a very important part of setting yourself up for a financially secure retirement. Having a lot of credit card debt, or still owing a significant amount on your home or car, can put significant pressure on your finances when you’re living on a fixed income. In addition, if you’re using your retirement income to pay off debt, this cuts into any buffer you might need for future financial emergencies and can make it more difficult to deal with smaller issues, such as inflation, that can eat away at your income.
3. You don’t have any financial dependents.
If you’re providing financial support to your children or parents—or if you’re one of the 15% of middle-aged adults (according to Pew Research Center) who are supporting both a child and an aging parent—you may not be financially ready to stop working. Having dependents to take care of makes it very difficult to downsize and minimize expenses, which retirement requires. In addition, most of the time, retirement plans only focus on an individual or a couple, and don’t usually make any provisions for other parties.
4. You don’t have difficulty making ends meet on your current income.
Many retirement planners and financial advisors suggest that, as a rule of thumb, you should plan to live off about 75% of your working income during your retirement (this figure assumes that you won’t be dealing with costs like contributing to a retirement plan, saving for a child’s college education, commuting, or other work-related expenses). However, if you are struggling to pay the bills on your current income, it’s unlikely that you’ll be in a position to make ends meet effectively when that income is reduced by 25%.
5. There are no major, foreseeable expenses in your future.
It makes good financial sense to address major, foreseeable expenses before you retire rather than afterwards. Larger expenses can add up quickly, particularly when the funds to cover these costs are withdrawn from taxable accounts, and the impact on your portfolio can be significant. So, if you’re thinking about buying a new car, replacing your roof, or purchasing a vacation property—but haven’t yet—it’s a good idea to do so before you stop working.
6. You’ve recently revisited your portfolio.
Social Security benefits will certainly supplement your retirement, but the area that you’ll need to rely on most heavily for post-retirement support is your investment portfolio. This means that before you think about retiring, you’ll need to know how your portfolio is doing. If your portfolio has taken a hit in recent years, your nest egg may be smaller than you were expecting, and it’s important to be aware of that before you start making retirement plans. Sitting down with your financial advisor, carefully re-evaluating your portfolio, and making any necessary adjustments should be one of your first steps if you’re thinking about winding up your career.
7. You’ve discussed retirement with your spouse.
If you have a spouse or partner, it’s important to be aware that your retirement will impact them just as much as it impacts you. Retirement is a personal choice, certainly, but it’s also a household choice that you and your partner will need to review together. Points to discuss include how a reduced income will affect your spouse, whether your spouse will need to work longer to cover your living expenses and how you both feel about that, and when your spouse plans to join you in retirement.