6 Key Signs You Can’t Afford To Retire

No matter how old you are, retirement should be a goal you’re diligently saving up and working toward. Unfortunately, and often due to a combination of poor planning and struggling to break free of bad financial habits, many people aren’t quite on track yet. 

So, if you hope to retire someday, you need to be sure you can afford to do so. Here are six signs you may not be ready to retire.

Ideally, you would transition into retirement debt-free. Of course, that’s not realistic for many people. “Having some debt, such as a home loan that may offer tax deductions, isn’t necessarily a bad thing,” said Melissa Hannum, an advanced markets specialist with COUNTRY Financial. “The problem arises when you still have a high level of debt.”

Industry guidelines suggest that your mortgage expenses (including principal, interest, insurance and real estate taxes) should be no more than 28% of your pre-tax household income. Your total debt (housing debt, plus auto loans and credit cards) should be no more than 36% of your pre-tax income. 

“If you are already struggling to keep your debt below these percentages, then you are not ready to retire,” Hannum said.

Shopping might be good for the economy, but not so much your bottom line. Hannum said that if you’re currently spending more than you’re earning, then you are not on track to retire.

“While employed, you may think that you’ll always have the opportunity to make up for bad spending habits by getting a higher-paying job, getting that annual bonus or even getting a raise,” she said. “When you’re retired, those opportunities are no longer available.” 

That’s why it’s important to get your spending in check now by creating a budget and sticking to it. “Having a budget doesn’t mean you can’t shop, travel or have hobbies — you just need to account for them,” Hannum said.

Even though you aren’t receiving a paycheck anymore, the same unexpected emergencies can pop up in retirement. “A random car repair, appliance mishap or unforeseen emergency room bills can derail a retirement plan and cause an unexpected cash crunch,” said Jordan Grumet, host of the Earn & Invest podcast and author of “Taking Stock.” 

He explained that retirees should have at least one full year’s worth of expenses saved in a liquid and conservative form of investment such as a money market fund, short-term CD or high-yield savings account. If you don’t have that yet, you’re not financially prepared for retirement.

If you put your 401(k) on autopilot when you first started contributing and haven’t really checked it since, Hannum said you may not be ready to retire. “Taking on excess risk as you near retirement can be extremely hazardous and your portfolio could take a major hit just as you’re ready to call it quits,” she explained.

It’s important to make the most of what you have saved up last throughout your retirement years. “As you near retirement, you should be shifting your portfolio away from strictly growth-oriented investments and focusing more towards a wealth-preservation strategy,” Hannum said. 

It can help to discuss your situation with a financial professional and determine whether you should rebalance your portfolio.

Having enough insurance coverage — especially when it comes to health insurance — is crucial in retirement. For those 65 and older, Medicare is available, but it’s not free.

Grumet noted that many people decide to purchase secondary insurance, and it’s important to consider medication costs as well. “A person should not retire if they have not factored in medical costs to their budget,” he said.

Finally, know that being prepared for retirement isn’t just about the numbers. It’s also about being prepared mentally, according to Hannum.

“If your social circle is strictly coworkers and Facebook friends, you may not be ready to retire,” she said. 

It’s important to have a plan in place to stay social and start thinking about ways to meaningfully occupy your time. Consider joining a club, starting a hobby, volunteering and making friends outside the office.

Heather Taylor contributed to the reporting for this article.