Workers also contribute less to retirement funds; Fox Biz Flash: 05/27.
You’ve planned it for decades: 2020 was supposed to be the year you would leave the workforce to embark on the adventures you anticipated in retirement. And then 2020 came, bringing one discordant event after another. The pandemic closed our country and caused a market crash from which it could take years to recover. And there is a chance that we can repeat this entire process if there is a second wave of COVID-19 cases.
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Aspiring retirees now face a difficult decision: should they continue with their original plans or postpone retirement for a few more years? If you are one of them, here is how you can decide based on your current financial situation.
How to decide if you should delay retirement
Retirement in 2020 may still be possible if you have funds for the rest of your life. But it’s the big question right now, as retirement portfolios have suffered huge losses in recent months.
You might have an idea of how long you need to last during your retirement from the calculations above, so if it’s low, you should know roughly how much. But it doesn’t hurt to rerun the numbers if you’re afraid of needing more than originally planned.
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Consider how much you have currently saved in your retirement account and approximately how many years you expect your retirement to last. It’s best to plan to live to at least 90 unless you have good reason to think you won’t. Use your average monthly expense as a reference to calculate your monthly retirement expense. Work with your pre-pandemic budget instead of your current budget, which is probably not an accurate reflection of your expenses when life returns to normal. Multiply this amount by 12 to get your estimated annual expense.
Then enter all of these figures into a retirement calculator. Use an annual inflation rate of 3% and calculate an annual return of 5% or 6% on your investments. Your calculator should indicate how much you should save overall to retire comfortably. Subtract from this amount the money you expect from a pension or Social Security to determine how much you need to save on your own.
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If you’ve already saved as much or more, you should feel fairly confident that you’ll have enough money for the rest of your life, assuming you haven’t significantly underestimated your life expectancy or annual spending. But if you realize that you don’t have enough, you will have to remedy the situation.
What to do if you can’t afford to retire this year
Spending less than you originally planned for retirement is one way to make up for the difference between what you have and what you need, but it’s a bit more risky than some of the alternatives listed here. You can plan to spend less, but you don’t always have control over it. A medical emergency or insurance claim could force you to spend more than anticipated.
Delaying retirement is another option if you can continue working and feel comfortable doing so. This strategy gives you more time to save for retirement and gives your retirement portfolio more time to recover from the recession before withdrawing funds. It also shortens your retirement, so you will need fewer months of savings.
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How long it takes for retirement is up to you. If you are close to your savings goal, a few months may be the solution, while others may need to remain in the workforce for a few more years. Re-run the calculations above with different retirement ages until you find the one that works best for you.
Rethinking your Social Security plans could also help. You can start receiving benefits as early as 62, but your checks increase for each month you wait until you reach age 70. Starting Social Security later puts a greater burden on your savings early in retirement, but you will have more checks later. great that will go further later. It can also make you more money overall, but this depends on how long you live.
Even in a normal year, there is always some uncertainty about whether you will have enough money for your entire retirement because there are so many variables in that calculation. But although 2020 is an unusual year in many ways, the principles for deciding whether you’re ready to retire remain the same. Do the math, explore a few different scenarios, and ultimately follow your gut.
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