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Can I afford to retire?

Feb. 17, 2014
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By David Munn

Learn more about David on NerdWallet’s Ask an Advisor

“Can I afford to retire?” If you find yourself asking this question, consider the following:

You don’t want to just retire.  You want to retire securely – with the resources necessary to live the life you want, and the confidence that those resources will last.

When it comes to retirement, remove the guesswork when possible.  If you are 100% confident your assets will never be depleted and your income in retirement will be more than your expenses, the following recommendation is unnecessary.

But for everyone else, one of the best steps you can take to acquire confidence about your retirement decision is to create a retirement spending plan.  This involves the discovery of two numbers:

  1. Your retirement income – Likely consisting of Social Security, pensions, and/or income from investments, this total will be your new paycheck.
  2. Your retirement expense estimate – How much will you spend to maintain the lifestyle you envision for yourself?  Perhaps you’ll spend less on gas and restaurants, but more on travel and new hobbies.  Certainly your numbers won’t be precise, but all you can do now is estimate.  If you currently track your spending in various categories, make an estimate for each individual category, one at a time, by evaluating how your life in retirement will be different.

Comparing these two numbers is a valuable starting point for a retirement decision.

Additional considerations:

  • Health care expenses: Regardless if you’re a cancer survivor or haven’t seen a doctor in 20 years, you will have health care expenses in retirement, and knowing how much they will cost over the next 30-40 years is nearly impossible to predict.  But that doesn’t mean you should skip establishing a baseline to work from.  If you don’t yet qualify for Medicare or an employer-provided plan in retirement, how will you fill the gap until age 65?
  • Long-term care expenses: Whether from a nursing home, assisted living facility, or in-home care, most retirees will incur some level of long-term care expenses.  Most will not be financially devastating, but unfortunately, that possibility does exist.  What is your plan to protect yourself and your family from the potential costs?
  • Liquidity: Financial assets are not that helpful if you are unable to access them without penalties.  If you’re under the age of 59 1/2 and plan to use assets from an IRA or 401(k), there are options available to access your funds without penalty, but they require forethought and planning.  Have you identified any liquidity restrictions you may face?
  • Dependents: Having dependents in retirement presents unique challenges, whether you are caring for an elderly parent or a child with special needs.  How will your decision to retire affect your dependent loved one?
  • Death: A married couple should always consider the impact when either spouse passes away.  How will income and expenses change?  Will the surviving spouse still be able to maintain a desirable lifestyle?