Retirement Planning
"If you don't find a way to make money while you sleep, you will work until you die." - Warren Buffett
When you think about retirement, usually the financial piece of it is the first thing you think of and yes we will dig into that aspect, but I want to challenge you to look at the whole picture. If and when you choose to retire, make sure you've put some thought and planning to what you want to retire to. Do you hope to spend more time with family, travel, side hustle hobbies, volunteer, ???... The possibilities are endless. Give it some thought before you make the leap.
Now onto the financial side of the equation and getting your ducks in a row so to speak so you can comfortably make the transition as smooth as possible. The first question on everyone's mind is "How Much Do I Need to Retire?" As with anything in personal finance, the answer is unique to your situation, but there are some general concepts to be aware of.
A good one to understand is the 4% Rule. This is a guideline that states that a retiree can withdraw 4% of their portfolio each year without having to worry about running out of money. So for example if your yearly expenses are $80k you will want to make sure you have $2 million saved in order to comfortably withdraw $80,000 each year.
As you approach retirement age you can also factor in additional income and coverage from Social Security and Medicare. Keep in mind you could be better off delaying taking your social security check as long as you can as the payout will grow the longer you wait.
Early Retires
One popular outcome of our current economic growth is the increase in early retirees. One thing that we track each month as part of our monthly finances is a graph that shows our 12-month running expenses, income, and passive income. For those who are saving and investing the majority of their income it won't be too long before your passive income (income generated from your investments, in our case dividends) covers your expenses. At that point you have reached financial independence and technically could retire. Although financially stable this should allow you the freedom to take the leap to self-employment, dream job, etc. You never want to quit being productive, but also shouldn't force yourself to be bitter in a job you don't enjoy.
"By failing to prepare, you are preparing to fail." - Benjamin Franklin
Retirement Checklist
You may be ready to retire if you can answer yes to the following:
- I have paid off all debt (including house)
- I have been tracking my yearly income, passive income, and expenses for 3+ years
- I have estimated what my projected expenses might be upon retiring (factored in increase travel expenses, etc.)
- My passive income > my expenses (12-month average)
- I have a comfortable emergency fund with a big enough buffer so I won't have to sell if the market goes down
- I understand what my health care options are post-retirement
- I know what the 4% withdrawal rule is and do not plan to exceed that amount each year
- I have thought about and know what I am retiring to (new hobby, etc.)
If you can answer yes to the above statements, CONGRATULATIONS!! You have your financial ducks in a row and are ready to take the leap on to your next big adventure. Let the fun begin!
CheckList
