Retirement used to be a three-legged stool – one that rested on pension checks, personal savings and Social Security benefits.
But today, that stool is a little wobblier, says Joe Buhrmann, a CFP® and senior financial planning consultant at Fidelity’s eMoney Advisor. Social Security seems less secure, pensions are a promise of the past for most Americans, and the lion’s share of retirement finances are now personal savings.
Knowing when to retire can be a confusing decision since you have to weigh a lot of different factors before deciding you’re ready. To help clarify your choice, CNBC Select has spoken with experts and compiled a list of milestones you need to reach before leaving work behind.
1. You have enough money to have the retirement you want
Figuring out how much money you need to have saved before you can quit working is a job in and of itself.
Some say that you should save at least 10 times your annual salary by the time you’re 67. Others point to the 4% rule, which states that you should be able to comfortably live off of about 4% of your investments in each year of retirement, thus allowing you to cover expenses for about 30 years.
The 4% rule is a good rule of thumb if you plan on spending the same amount of money in retirement as you do now. But Jackie Cummings Koski, a CFP® and financial consultant who retired at 49, recommends you start by building an estimated expense budget for your retirement years for a more accurate prediction of how much money you need to save now.
“One of the first questions would be ‘What does retirement look like for you?’” Koski says. “So, for some people, that doesn’t mean that they want to do anything but play with their grandkids and travel.” Obviously, a retirement filled with frequent traveling is more expensive than staying home and spending time with family so you’ll need to save a lot more money if you decide to do the former. Otherwise, you risk outliving your savings.
Once you’ve got an estimate of your annual retirement budget, multiply it by 25. That’s a fairly accurate savings goal to get you through retirement. For example, if you spend $40,000 a year, then you hypothetically need $1 million dollars ($40,000 x 25) to retire comfortably. Just remember this is only an estimate, and that it’s better to save too much for retirement than too little.
2. You have a fund for unforeseen expenses
One of the biggest mistakes a retiree can make is not having an emergency fund. In retirement, a lot of your investments and sources of income are less liquid than cash, since you can’t just go to your bank and withdraw cash from your account instantly when your money is invested in the market.
A great place to keep your emergency fund is in a high-yield savings account, which lets your money safely earn interest while still enjoying FDIC protection. Marcus by Goldman Sachs High Yield Online Savings is one no-fee, no-maintenance option that works well for emergency funds. It’s a straightforward way to save and grow money with minimal stress.
The Ally Savings Account also has a solid APY and allows its account holders to organize their saving goals in different “buckets” within the same savings account. Its accompanying mobile app and 24/7 live customer service might also come in handy when you need your funds without any fuss.
But no matter what account you choose to put it in, your emergency fund should remain easily accessible and shielded from the ups and downs of the stock market.
“You don’t want to say ‘Honey, you can’t have that heart surgery because our accounts are down 20%,’” Buhrmann says. “You want that to be safe and secure.”
3. You have a diverse portfolio to protect your wealth
It’s not a good idea to put all your eggs in one basket when it comes to creating sources of income for retirement. You mitigate risk by spreading your savings and investments across multiple streams of future income.
″You build wealth through concentration. You protect wealth through diversification,” says Scott Bishop, a Houston-based CFP® who specializes in retirement planning.
If you’re trying to build some momentum early in your retirement savings journey, it might be smart to invest in securities with the potential for higher returns (like stocks) but are also riskier. If you’re closer to retirement, it might be smart to invest in safer but slower-growing accounts like certificates of deposit, treasury bills or money markets, Bishop says.
Robo-advisors like Betterment and Wealthfront can help you invest in a retirement portfolio that aligns with your needs, as they take your preferences, like risk tolerance, time horizon and financial goals, into consideration. These platforms are a hands-off way to invest your money, as they automatically rebalance your portfolio over time to account for changes in your time horizon and needs.
Working with a financial planner is another way to help you figure out how to best diversify your retirement portfolio, relieving some of the stress that accompanies retirement saving.
Still, make sure you have cash reserves on hand for when the markets curve downward. This way, you can leave your investments untouched, allowing them to rebound, instead of pulling money out of them to cover your expenses. Diversifying your retirement income like this allows you to financially thrive longer and safer in retirement.
4. You know how Social Security fits into your retirement income
Bishop also says one of the biggest financial stressors can be the absence of a guaranteed lifetime income, one that might be provided by a pension (if you have a job that provides one), an annuity or Social Security.
Koski says to get an idea of how much you can depend on Social Security, log onto the government’s Social Security website and check your projected benefits. These benefits will give you a decent estimate of your passive income after retirement.
It’s often best to wait until full retirement age (70 years old) to start drawing Social Security according to Bishop. Though you can begin drawing social security at 62, you receive considerably higher payments when you wait until 70. “I’ve had clients that have made those decisions and regret that now because they’re getting $1,500 or $1,600 a month from Social Security, where they could have had $2,400 or $2,500 a month if they waited a few years,” he says.
5. You have a plan to afford healthcare
Healthcare costs rise exponentially in retirement. Many people receive health insurance through their employers, but this benefit typically ends once the individual no longer works there.
Buhrmann recommends weighing all your healthcare options and investing in sturdy, wide-reaching plans, specifically Medicare and complementing it with a health savings account (HSA), a triple tax-advantaged way of saving for upcoming medical costs. These savings then accumulate interest over time and can be used to reimburse you for qualifying medical expenses. To get the most out of your HSA, you need to invest in it as soon as you can and not wait until your retirement is around the corner.
“Just like trying to buy home insurance as your house is on fire, trying to buy long-term care insurance the week before grandad goes into the nursing home is not the time to try and buy,” Buhrmann says.
6. You have eliminated “bad debt”
Bad debt is high-interest consumer debt like unpaid credit card balances, Buhrmann said. You should take care of this before retiring and strongly consider adjusting your spending habits before ending your working income.
One way to eliminate uncontrolled debt is by taking out a debt consolidation loan. This loan allows you to pay off all your outstanding debt and instead streamline your payments in one place, with one monthly due date and, ideally, a lower interest rate. One option is a personal loan through SoFi, which has no origination fees, no early payoff fees and no late fees. Upstart is another recommended lender, particularly if you don’t have a credit score or a robust credit history.
Bottom line
Retirement doesn’t look the same for everyone, and we all have different definitions of what’s “enough” money you need to finally put work in your rearview mirror. But if you’ve accomplished the actions listed above, you’re probably nearing the home stretch before your well-earned rest and relaxation.
