If you’ve listened to financial experts about planning for retirement, you know it’s essential to start as early as possible and diversify your investments as much as possible. But how do you know for sure that you’re prepared?
Here, experts explain 11 signs that show you will be able to live off your retirement nest egg.
You Have a Plan
Retirement readiness is more than just about the numbers, according to Dominic James Murray, financial planner with Cameron James. “It’s about having a solid plan for your assets, being free from debt, and feeling ready for this new phase of life. It’s about finding the right balance between smart financial planning and personal happiness.”
That plan should consider both early and late retirement, since you might spend 20 to 30 years or more in retirement, according to Jeff Rose, CFP, CEO and founder of Good Financial Cents. “It’s crucial to create a budget for your expected retirement expenses and compare it against fixed income like pensions or Social Security plus your savings and investments,” Rose said. “If there’s a gap, consider working longer or cutting expenses.”
A great sign of being ready to live off your retirement nest egg is not having any debt before retirement. Achieving this includes tackling high-interest debts and, if possible, paying off you mortgage.
“It’s a liberating feeling to enter retirement without these financial burdens, and it opens up more possibilities for enjoying those golden years,” James said.
You Understand Your Assets
According to James, if you understand the full picture of your financial health — taking a thorough inventory of your assets, liabilities, savings and income streams — you’ll be prepared for any unexpected turns in retirement.
You’ve Built a Robust Emergency Fund
James emphasizes the importance of a solid emergency fund, separate from retirement savings, as another key sign that your nest egg can go the distance. “It’s not just about having six months’ worth of expenses saved; it’s about the peace of mind it brings. Knowing you have this buffer can make a significant difference in how you experience retirement,” he said.
You’re Accounting for Healthcare Costs
Healthcare is often one of the biggest expenses in retirement. James believes that people who understand and plan for these costs, including exploring options like Medicare and long-term care insurance, are going to be in better shape in retirement, allowing their nest egg to last.
You’re Strategically Claiming Social Security
According to Rose, another sign that you’re ready to live off your retirement nest egg is that you’ve figured out when to claim Social Security benefits to optimize them. “There’s an eight-year window, between ages 62 and 70, to start claiming Social Security retirement benefits. Waiting longer increases your monthly payment,” he said.
Claiming Social Security before full retirement age (66 or 67) reduces the monthly payment by about 8% each year. “Claiming after full retirement age increases it by roughly 8% each year until you turn 70,” he added.
You Have a Tailored Investment Portfolio
Savvy retirees also have a diversified investment portfolio tailored to retirement goals, with a solid awareness of their risk tolerance, James said. A diversified portfolio supports your desired retirement lifestyle, ensuring you’re not taking on too much or too little risk.
Your Estate Planning Is Up to Date
Those who are able to retire on their nest egg most likely have a current estate plan, including wills and powers of attorney. James said, “It’s about peace of mind for them and their loved ones.”
You’ve Established a Sustainable Withdrawal Rate
Jake Claver, finance expert and qualified family office professional and owner of Syndicately, explained that retirees will be able to live off their nest egg if they’ve established a sustainable withdrawal rate from their retirement funds. “A common benchmark is the 4% rule, but this can vary based on your lifestyle and inflation rates. Adjusting your withdrawal rate according to market performance and personal circumstances is vital,” Claver said.
Daniel Callahan, CFA, partner and chief investment officer with Capasso Planning Partners, expanded upon the 4% rule. “Sum up your entire nest egg and multiply that number by 4%. If this number is close to covering your spending, you are in great shape for retirement.”
He said this rule of thumb is actually quite conservative, which is why it’s a good starting point. “Many times, the 4% rule will actually end up in a retiree reaching their latter years with MORE money than they started with at the beginning of retirement,” said Callahan.
You’re Set Up for Consistent Growth
Additionally, the retirement accounts that will be able to keep giving you the income or returns you need are those that have “consistent growth,” Claver said, “keeping pace with or exceeding inflation.” If you find some accounts are not producing the results you want, be sure to speak with your financial advisor to make changes.
You’re Keeping Track
To check if your retirement savings are on track, you should use your age and income to calculate your target savings using an annual income multiplier, Rose explained. “For example, at age 40, you should have saved 3-4 times your annual income. This multiplier increases with age.”
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