Can I Afford to Retire?

You can afford to retire when the income you can depend on, plus what your savings can reasonably provide, is enough to support the retirement you actually want to live.

That’s why the number in your 401(k) isn’t enough to answer the question.

Someone with $1 million saved may not be ready to retire. Someone with considerably less may be.

The difference is what retirement will cost, how much dependable income you already have coming in, and what your savings will be asked to provide.

A retiree spending $4,000 a month with substantial dependable income may need far less from savings than someone spending $10,000 a month with little dependable income.

The account balance only makes sense in relation to the job it has to do.

Start With the Paycheck

While you’re working, the question is fairly simple: does your paycheck cover your life?

Retirement doesn’t change that question. It changes where the paycheck comes from.

Start with the income you expect to receive without taking withdrawals from your savings:

• Social Security
• A pension, if you have one
• Other dependable income

Then compare that with what you actually expect to spend.

Housing. Food. Utilities. Transportation. Healthcare. Insurance. Taxes. Travel. Helping family. And yes, having some fun.

If you expect to spend $6,000 a month and have $4,000 of dependable income coming in, your savings don’t need to replace your entire paycheck.

They need to provide the other $2,000.

That’s a very different question from:

“Do I have enough saved?”

You spent decades accumulating money. Retirement requires figuring out how to turn those savings into a paycheck.

How Much of Your Income Needs to Be Dependable?

Not every retirement expense has the same job.

The electric bill has to be paid. So do groceries, insurance premiums, property taxes and basic healthcare costs.

A vacation can wait. A utility bill can’t.

Start by identifying the expenses that must be paid every month and compare them with the income you can depend on. That’s the idea behind a retirement income floor.

If Social Security and a pension cover your essential expenses, you may already have a substantial income floor.

If they don’t, you have an income gap.

Now you have a decision to make.

You can rely on withdrawals from your retirement accounts to fill that gap. You can adjust spending. You can work longer. You can reconsider when to claim Social Security.

You can also use an income annuity to create additional guaranteed lifetime income.

That’s why guaranteed lifetime income can come from several places: Social Security, pensions and income annuities.

The important question isn’t whether everyone needs an annuity.

It’s whether you have an income problem that an annuity can help solve.

What Does Your Savings Have to Do?

Once you know the income gap, you can give the rest of your money specific jobs.

How much needs to remain liquid?

How much will you need to withdraw each month?

How long might those withdrawals need to last?

What happens if the market falls during your first few years of retirement?

Which money should you spend first?

What happens as inflation raises the cost of living?

These questions matter because retirement isn’t just about earning a return.

It’s about having money available when you need it.

A market decline when you’re 45 and contributing to your retirement account is one thing.

A market decline when you’re 67 and withdrawing money every month to pay bills is another.

That is why the order and timing of retirement income matter.

Cash, CDs, fixed annuities, income annuities and market investments can all have different jobs.

Some money may need immediate liquidity. Some may need protection from market losses. Some may need growth. Some may need to produce income for the rest of your life.

You don’t have to make every dollar do the same thing.

Social Security Is More Than a Starting-Age Decision

Social Security is often one of the largest sources of lifetime income a retiree has.

That makes the decision about when to claim it more important than simply asking, “How much can I get at 62?”

Waiting increases the monthly benefit. Claiming earlier provides income sooner. For married couples, the decision can also affect the income available to the surviving spouse.

The better question is what job Social Security needs to do in your retirement income plan.

That decision can change how much your savings need to provide every month.

Don’t Forget Taxes

Having $6,000 of retirement income isn’t necessarily the same as having $6,000 available to spend.

Traditional retirement-account withdrawals, Roth distributions, Social Security, pensions and other sources can receive different tax treatment.

Where your retirement paycheck comes from matters.

That’s why taxes belong in the retirement income conversation, along with your tax professional when tax advice is needed.

Will the Plan Still Work When Life Changes?

Retirement may last 20 or 30 years, sometimes longer.

The plan has to survive more than your retirement date.

Markets will change. Inflation will change. Healthcare expenses can change.

And needing care later in life can create an entirely different demand on retirement assets. That’s why a retirement plan that accounts for living longer also needs to account for the possibility of needing care.

If you’re married, there is another change the plan needs to survive.

Eventually, there may be only one of you.

One Social Security benefit may disappear. Pension income may change. Taxes can change. But many household expenses remain.

That creates a retirement question couples sometimes don’t ask until much too late:

What happens to our retirement income when one spouse dies?

A retirement income plan that works for two people also needs to work when there is only one.

That’s not a side issue. It’s part of determining whether you can afford to retire in the first place.

So, Can You Afford to Retire?

Forget the magic retirement number for a moment.

Answer these questions instead:

What will retirement cost each month?

How much dependable income will you have?

What’s the income gap?

What will your savings need to provide?

How much needs to remain liquid?

Which expenses do you want covered by dependable income rather than market withdrawals?

What happens when markets fall, taxes change, you need care or one spouse dies?

If those pieces fit together, you may be able to afford to retire.

If they don’t, you’ve identified what needs to be solved.

Maybe the answer is spending less or working longer.

Maybe it’s changing when you claim Social Security.

Maybe it’s repositioning part of your savings.

Maybe an income annuity can provide guaranteed lifetime income to fill part of the gap.

Often, the answer is a combination.

The product isn’t the starting point. The problem is.

Once you know what your retirement paycheck needs to look like, what income you can already depend on, and what jobs your savings need to perform, you can evaluate the tools available to solve the gaps.

That’s a much better place to start a retirement conversation than asking whether you’ve reached somebody else’s magic number.

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Kurtz Lytle is the founder of IUL.Solutions, an independent insurance and retirement income practice based in Nashville, TN. All recommendations are made only after a full suitability review in accordance with each state’s insurance regulations. IUL.Solutions does not provide tax, legal, or investment advice. NPN #8993693.