Retirement Readiness: Easy Math You Should Do Before You Retire

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Financial Wellness

Retirement Readiness: Easy Math You Should Do Before You Retire

3 min read Oct 29, 2020

You might have an idea about when you’d like to retire—whether that's a specific age you're targeting or a date on your calendar marked "last work day!" Making the transition from work life to retirement is a milestone that requires planning.

One critical question you might have: How do you know you’re financially prepared to retire?

Glad you asked—because doing the following simple calculations will help you better evaluate your finances long-term.

1. Determine the age you’d like to retire

According to 2018 Gallup data, Americans tend to retire around age 61. But that age may not be what you have in mind. Findings from MetLife's 2020 Evolving Retirement Study reveal that 45 percent of workers want to delay retirement so they can save more; another 29 percent want to work longer to qualify for higher Social Security benefits; and 9 percent never expect to retire. Regardless of your specific circumstances, it's good to have at least an estimated age of when you want to retire, so you have a starting point for your calculations.

You might begin with the full retirement age defined by Social Security. Full retirement means the age when you're eligible to receive full social security benefits, which depends on the year you were born. For example, the full retirement age for anyone born after 1960 is 67 years old. If you were to retire at a younger age, you wouldn't receive your full benefits, which is important to be aware of. Use this tool on the Social Security website to determine your full retirement age.

2. Estimate the number of years you expect to live after you retire

It's not the easiest thing to think about, but once you determine when you want to retire, you should estimate how long you expect to live in retirement. (Keep in mind that most people underestimate how long they’ll live). How can you determine that number?

Try using this life expectancy table provided by the Social Security Administration. That way, you can make a data-based calculation, instead of just guessing. Overestimating might work in your favor from a financial perspective because you'll have more than what you need.

Once you determine your estimated life expectancy, subtract your retirement age from that to figure out how many years' worth of retirement funds you need. For instance, if you expect to live until age 90 and want to retire at 67, you need to fund 23 years' worth of retirement.

3. Review how much retirement savings you have so far

Now that you understand how long you expect your retirement to last, look at how much you already have saved.

You might want to talk to a financial advisor to review your retirement and other savings accounts—that might include CDs, IRAs, 401(k) or pension, and more. Figuring out how much your nest egg is worth right now is key in helping to determine if your retirement finances are on track. It's also an opportunity to consider adjusting your investments.

Are you getting the most out of your 401(k) employer match? Should you create a monthly savings goal? These are the questions you should get answers to now in order to be ready for retirement, no matter what age you are.

4. Determine additional sources of income

While adding up what you’ve saved so far is an important measurement, it doesn’t account for other income streams that can help you fund your retirement, such as:

  • Pension
  • Social Security benefits (use this tool to estimate how much you might receive).
  • Income annuities
  • Other investment vehicles, like home equity

Certainly, retirement doesn't have to mean stopping work entirely. You can also generate other sources of income—as well as stay engaged in your community and the causes you care about—by continuing to work part-time or in a consulting role.

5. Calculate your likely retirement budget

Now that we've calculated retirement age, life expectancy, savings, and income, it's time to crunch the numbers around expenses.

Factor in costs of living, like housing, utilities, groceries, and transportation, as well as healthcare and insurance policies. Online calculators, like this one for groceries, can help you evaluate what this might cost. Next, think about your discretionary spending for travel, hobbies, shopping, and entertainment.

And don’t forget to account for emergency situations (like a home repair), surprise healthcare costs, and potential future needs, like long-term care. You might want to enlist the help of a financial advisor, if you're uncomfortable making estimates. Once you know how much you expect to spend on a monthly basis, you can begin to compare that to the savings and income you expect to receive and see how the numbers match up.

Are your retirement goals on track?

Based on your responses to the factors above, you may or may not have a definitive answer to this question, and that's okay.

There are things you can do to take charge of your retirement planning right now, such as reducing your expenses, adjusting your retirement timeline, and boosting your retirement savings contributions. You can even consider products like annuities or insurance policies that can make retirement more comfortable for you. For help in calculating your retirement plans, use our retirement worksheet.

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Nothing in these materials is intended to be advice for a particular situation or individual. These materials are for general information purposes only.