Can I Afford to Retire Now?

Here are some questions and calculations to help you figure out whether you're financially ready for this big step.

Deciding whether you're ready for retirement is an intimidating and complex consideration. How do you calculate just how much money is enough? Or gauge precisely whether you can truly afford to say goodbye to the daily grind?

A recent study from Principal Financial Group showed that about three in 10 workers have concerns about not being able to retire when they want to.

As daunting as the retirement readiness question may be, it's one that most of us will have to address sooner or later. Of course, you can answer this question with some degree of certainty. To help you with the deliberations, we asked financial advisors and retirement experts for guidance on how best to determine whether you're ready to draft a permanent "out of office" reply.

01 of 05

Create a ballpark retirement savings goal.

Let's begin by addressing the elephant in the room: How do you develop a reliable retirement savings goal that allows you to confidently leave the workforce?

The experts at Fidelity Investments have a simple rule of thumb to address this question. Rita Assaf, Fidelity's vice president of college and retirement leadership, says you should aim to save 10 times your annual salary by the time you reach age 67. So the first question to ask yourself is how your current retirement savings compares to that benchmark.

"The ten times goal may seem ambitious, but you have many years to get there," says Assaf.

To help you stay on track, Fidelity offers these age-based milestones: Aim to save at least one time your income by age 30, three times your income by 40, six times your income by 50, and eight times your income by 60.

"This rule of thumb can provide a starting point to help your build your savings plan and assess your progress," says Assaf.

02 of 05

Conduct annual financial checkups to assess retirement readiness.

In the same way you undergo annual check-ups with a doctor, you should also have a yearly check-up with your finances. This can either be done with an expert advisor or on your own if you feel comfortable. No matter which approach you choose, this is a critical retirement readiness step.

"During this annual checkup, make a list of every retirement account you have, as well as each account's balance—including retirement plans through current and former employers," says Sri Reddy, senior vice president, retirement, and income solutions at Principal. "Review how much you're contributing to your current retirement savings plan and contribute at least enough to ensure you receive the maximum employer match."

As part of this annual financial check-up, try to determine approximately how much income you'd have available once you stop working. The answer to this question will depend on how long you plan to continue working (and you'll also want to keep your projected cost of living during retirement in mind when contemplating this figure, as well as projected retirement healthcare costs.)

"This process enables you to adjust things like asset allocation and funding to help you stay on track for your goal," explains Reddy. Fidelity's Assaf also advises conducting periodic reviews of your asset mix.

"Make sure your money is working for you and has potential for growth," says Assaf. "Choose the right mix of stocks, bonds, and cash based on how far you are from retirement, and how comfortable you are taking potential a risk in your portfolio."

03 of 05

Develop a retirement 'paycheck' plan.

After decades of working, you'll need a solid plan for generating a different kind of paycheck during retirement. To do this, you'll likely rely upon your guaranteed retirement income and your fluctuating retirement income.

"Guaranteed income is money you know you'll have, including Social Security, a pension plan, or an annuity," says Reddy. "Changeable income is everything else, including investments, your 401(k), IRA, part-time work, and other sources of income that aren't guaranteed. Because this income may be dependent on the market or other factors, it can fluctuate. Determining your retirement income plan now is critical for determining if you're ready to retire."

04 of 05

Estimate your retirement expenses.

Here's another homework assignment: Place your current expenses into two categories—wants and needs. You need to pay for things like utilities, housing, groceries, healthcare, and insurance. The wants category (which we'll dive into next) includes things like travel, dinners out, and personal splurges.

As part of your needs calculations, be sure to consider inflation and how it will play a role in your future cost of living, says Reddy. And don't forget to include the cost of living for a spouse or partner in your calculations.

Factor in the expenses associated with healthcare during retirement, which are likely to be even more significant as you get older.

"Healthcare is one of the largest concerns and an important area to focus on to ensure your well-being and quality-of-life is secured," says Andrew Meadows, senior vice president at Ubiquity Retirement + Savings. "Make sure you're up to speed on the costs associated with that."

Some of the questions to consider on this front (in order to truly assess costs) include whether you will have retiree medical coverage available through your employer and how much Medicare will cover.

"Talk with a financial professional to develop a retirement income strategy that factors in medical coverage and the rising costs of healthcare," recommends Reddy.

05 of 05

Define your retirement lifestyle goals.

Finally, after you've considered all other factors and fixed costs, think about what you want your retirement lifestyle to look like and how much it will cost.

"Do you hope to continue, or enhance, your lifestyle in retirement?" says Reddy.

Fidelity's Assaf also emphasizes the importance of lifestyle considerations and their impact on your retirement readiness.

"Do you expect your expenses to go down when you retire?" she says. "We call that a below-average lifestyle. Or will you spend as much as you do now? That's average. If you expect your expenses will be more than they are now—say you want to travel a lot and see the world—that's above average. These expectations will play an important role in how much you will need to have saved and whether you are ready."

Ultimately, your retirement lifestyle will dictate whether you're truly ready to retire.

RELATED: Do You Really Need a 401(k) to Retire? People Over 50 Without One Weigh In

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  1. Principal, Consumers Press Forward with Caution and Optimism. Accessed December 11, 2022.

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