Imagine you’re 60 years old, with $1.1 million in cash and $800,000 in retirement savings. Your Social Security benefits will amount to $3,000 per month at 62, and you will have an additional $5,000 in pensions set to kick in at 65. On paper, this seems like a comfortable financial situation. However, retiring at 60 presents its own set of challenges and considerations.
Before determining whether retirement is feasible, it’s crucial to assess all five factors of your retirement, something we call a Five-Factor Retirement Plan.
Retirement Age: This first factor is the age at which you plan to retire, but it also considers your life expectancy. The younger you retire, the longer you should plan for your retirement to be.
Spending: The second factor is determining your projected expenses during retirement. Typically, in your working years, you view your expenses from the top down. You take how much income you have and subtract from that amount all of your expenses, such as health insurance, taxes, and retirement contributions, and then you live on what is left. In retirement, you do the exact opposite. You look at what you need to have in your bank account to live the lifestyle you want. Then, you will need to add in additional expenses like health insurance, vacations, other insurance, and inflation.
Income Sources: The third factor, which goes hand in hand with spending, is income in retirement. Your income sources can be a mix of Social Security, pensions, retirement savings, rental income, and even part-time income. It is important to also look at how these sources will change over time during retirement.
Savings: This fourth factor is the one most people think of when they think about retirement, and that is savings and investments. For savings, you will need to consider how much you currently have saved and how much you plan to contribute until retirement.
Investment Risk: The last factor is your investment risk, which means the amount of risk you are willing to take now until retirement and how much risk you are willing to take while in retirement. It is common for people to not want to take on a lot of risk while in retirement, which may mean you will need to take on more risk before.
All of these factors are interconnected. If you plan to retire earlier, you will need to save more or cut back on your expenses. If you plan to have multiple income sources outside of your investments, you may be able to take less risk inside of those investments.
While the scenario above paints a promising picture, filling in the missing pieces is crucial. We have four of the five factors of retirement, but without knowing your projected expenses, it is challenging to determine if your retirement funds will suffice. With income being $8k a month and an additional $2 million saved, that should get you an additional $6k a month, bringing your monthly gross income to around $11k. While many people can live off $11k a month, the person who spends $15k a month cannot.
Additionally, retiring at 60 requires careful planning for health insurance until you qualify for Medicare at 65. You’ll also need to bridge the gap between retirement and when your Social Security and pensions kick in.
Retiring at 60 with a solid foundation is a commendable achievement. However, it’s essential to approach this milestone with careful consideration and planning. By evaluating all aspects of your retirement plan and seeking guidance from your CERTIFIED FINANCIAL PLANNER™, you can enter into retirement with confidence and clarity.
If you would like to have a CFP® complete a Five-Factor Retirement Plan with you, contact us today.
