The answer to this question is different for everyone. Some of us can retire tomorrow, while others will be able to retire after several decades of saving and investing. Some may even feel they’ll never be able to retire! However, the first step in determining this is to determine how much money you’ll need on an inflation-adjusted basis to survive each year.
This amount should take into account the quality of lifestyle you’re accustomed, while also being realistic. After this annual income need is determined based on all your retirement sources of income (social security, 401(k), pension), the second step is to calculate how much money you will need to accumulate or save in order to withdraw that amount each year—without outliving the money you have accumulated through strategically saving.
The third step in this equation is to determine the inflation adjusted number of this amount. For example, if we determine you’ll need to save $1,000,000 for retirement over the next twenty years, we will need to factor inflation to that dollar amount. Specifically, if we peg an annualized inflation rate of 3%, the $1,000,000 you planned to save actually is more like $1,800,000 after adjusting for inflation. Given this example, it is obvious that inflation becomes a key risk when saving for retirement and it is therefore necessary to limit inflationary risk by properly investing so you can afford to retire.
It is easier to answer the question of when can I afford to retire as this is a quantifiable number that we can assign. The toughest part of this process is the how I can afford to retire. The easiest answer is: save, save, and save some more. In order to achieve this target amount, it is necessary to:
For example, an investor in her 20’s may be properly invested if her portfolio is entirely in equities, while an investor in her 50’s may be properly invested if it’s a balanced mix between equities and fixed income.
The final step to this process is to not be overwhelmed. It is our job to work with you in writing the blueprint for a retirement plan. In this plan we can account for income and growth opportunities, while providing the short term objectives you must achieve to meet your long term goals. It is never too late to start planning for retirement and you are taking the necessary steps.