Can You Afford To Retire Tomorrow?

One of the most common questions clients present to us is,

“When can I comfortably retire?”

They want to know if the nest egg they’ve diligently accumulated over the years is enough to get them to and through a long retirement. 

To help, we’ve outlined how you can evaluate your retirement savings needs, “test drive” your budget, and adjust your savings strategy before leaping into your golden years.

Go Gently Into The Retirement Red Zone

Legacy Wealth Advisors specializes in helping those entering the “red zone” prepare for retirement.

What’s the “red zone?”

No, it’s not the coveted field location in football that sets teams up to score. In terms of retirement, the “red zone” refers to the five to ten years before you leave the workforce. 

Unlike an NFL red zone, where teams may be more apt to take risks and show off their offense, a retirement red zone is where many people benefit from strong defense. This translates to being more cautious with spending and saving—spending less and saving more. 

The “red zone” is when we buckle down to ensure a smooth transition into retirement. It’s important because this approach is designed to protect your assets and cash flow. By letting up on the gas pedal a bit, we help mitigate the sequence of returns risk and offer a cushion against negative returns in the early years of retirement.

When you’ve reached this point, some critical things to consider include:

• Evaluate your current savings
• Identify potential savings gaps
• Analyze spending and pinpoint habits you want to avoid
• Test drive your retirement spending estimates

Let’s dive a bit deeper into each of these categories.

Evaluate Your Current Savings

When considering your countdown to retirement, start by identifying all of your assets, including anything in your retirement accounts (401(k), IRA, etc.), brokerage accounts, real estate, cash savings, etc.

Calculate everything to determine the size of your nest egg. From there, we can estimate how much you’ll have when you actually retire by calculating your investments’ projected rate of return. 

Here at Legacy Wealth Advisors, we use financial planning software to provide real-time projections, enabling you to see how your savings could translate to spending when you retire. This tool can help give you confidence in your “retirement number” and help us create a strategy that will help support your future spending needs. 

Estimating your projected income for retirement is necessary to identify any potential savings gaps.

Mind The—Potential—Savings Gaps

For some people, there’ll be a discrepancy between how much you have saved for retirement and how much you’ll truly need to maintain your current standard of living.

Remember, understanding this gap starts by assessing how much you’re projected to have in retirement.

If you aren’t sure how much you expect to spend, take your retirement savings for a “test drive.” Here’s a simple calculation. Multiply your current cost of living and how long you anticipate being in retirement. 

• The average U.S household income is $87,864.
• Most people’s retirement will last about 20 years.
• Based on the equation above, if you want to spend the same in retirement for 20 years, you’d need a $1.76 million nest egg. 

Try that same exercise but with your expected numbers. Will your current (or projected) nest egg cover this amount? Can you make compromises on your spending? How can you create a savings/investment plan to boost your savings over the next decade? 

If you’re having trouble assessing your spending, grab out your credit card and bank statements over the last year to help get as accurate an estimate as possible.

If you believe there may be a gap, we recommend you use your time in the “red zone” to address this and create a strategic plan for filling it. 

Test Drive Your Retirement Spending Budget

Test driving is an integral part of preparing for retirement.

To drill down deeper, we recommend thinking about how your spending habits may change—or stay the same—as you enter retirement.

• Do you think your pace of spending will remain fairly similar, or is it possible you’re underestimating your lifestyle costs? 
• What significant costs do you anticipate in retirement, such as an out-of-state move, buying a vacation house/condo, increased travel, etc.?
• How do you envision spending your time?

With more free time on your hands in retirement, you may be looking forward to joining a country club, traveling, starting a small business, and more. With changes like these, you’ll want to prepare a savings strategy that accounts for these new expenses.

Making Strategic Financial Decisions

During the years leading up to retirement, determine if you need to ramp up your savings or if you’re comfortable continuing to save at the same rate. By identifying whether or not you have a gap in your retirement savings and expectations, you can strategize accordingly.

Many of the financial decisions you make during this “red zone” period can help set you up for success in retirement, like increasing your retirement savings and reducing expenses.

Increase Retirement Savings

Once you reach 50, you can start making additional contributions—known as catch-up contributions— to certain retirement savings accounts. Taking advantage of catch-up contributions can help you fill the gaps in your savings strategy and even provide an extra cushion.

2022 contribution limits include:

• 401(k) & 403(b): $20,500 limit with $6,500 catch-up contributions
• IRA: $6,000 limit with $1,000 catch-up contributions
• HSA: $7,300 family limit with $1,000 catch-up contributions (For those 55 and older)

If you aren’t yet maxing out your retirement contributions, consider doing so as you enter the retirement “red zone.”

Reduce Expenses and Debt

Debt can look highly different before and after retirement. 

When you have a steady paycheck coming in, the mortgage payment may not be as big of a concern, but once you retire, you’ll likely become much more aware of where you put your hard-earned money.

What debt are you still paying down? Consider addressing debts like car payments, mortgages, medical bills, personal loans, and more before entering into retirement. Debt, especially high-interest debt, can really chip away at your retirement savings when not managed properly.

Next, ask yourself, are there any expenses you can reduce before retirement? Take a look at your current cash flow plan and identify potential areas for improvement. Do you really want to put a bunch of money into home renovations when you plan on selling the house when you retire? If you’re paying for seven streaming services, are you comfortable parting ways with a few you never use? 

Minor adjustments here and there can add up to significant savings over the span of retirement.

Ready to Retire?

Everyone’s on a different path when it comes to retirement. Whether you’re ready now or looking to wait a few years, working with a financial partner can be a complete game-changer. 

At Legacy Wealth Advisors, we help those nearing retirement develop a comprehensive strategy and transition smoothly to financial independence. Reach out to our team anytime to talk about your personal journey toward retirement and how we may be able to help.

Disclosure:

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.