In a perfect world, we’d all be able to stop working when we want and still have the retirement lifestyle we dream of. But while you may have earned the right to retire via decades in the working world, that doesn’t mean your finances are where they need to be to be able to do it comfortably and responsibly.
To help you understand where you stand, here are four signs that you’re ready to stop working.
1. Your dependents are fully independent
Even if you have “enough” saved up to retire as an individual or couple, that doesn’t necessarily mean you’re financially ready to retire. If you have dependents who are still depending on you for at least some financial support, that means the money you have isn’t going to go as far. So one key milestone to understanding if you’re ready to retire is making sure that your dependents are independent in their own personal finances.
2. You’re debt free (or close to it)
Debt is another factor that can help determine if your finances are in a good position to support your retirement. Again, if you’re constantly funneling money out of your accounts to pay off existing debts, that’s less money in your pocket to go toward things like enjoying your retirement.
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This can be challenging, but you don’t necessarily have to be 100% debt free to be ready to retire. For example, if you still have a mortgage, but that payment amount is modest or will be paid off within a few years, you may still be in a position to retire.
3. You have a healthy emergency savings account
When you use a retirement calculator, you usually use information like how much you earn per year and how much you plan to live off of to understand how much to save in a 401(k) or IRA. But what these don’t often account for is emergency expenses. What if your home‘s roof becomes damaged and needs to be replaced? What if you break a leg on vacation and need emergency surgery?
You need to have a contingency plan. That means having an emergency fund that has at least three to six months’ worth of cash to cover necessities. That way, you won’t have to dip into your retirement savings to pay for those costs and then live a less satisfying lifestyle to make up for it.
4. You can live comfortably off of 4% of your retirement savings
When it comes to the question of what’s enough to retire, here lies the golden rule: You should be able to comfortably live off of just 4% of your total retirement savings. For example, if you have $1 million saved and now plan to retire, you should be able to live off of $40,000 during your first year in retirement. (You’d add the annual inflation rate to that amount for each subsequent year.)
That amount should cover everything from your mortgage payment to food to medications to fun. This rule is a useful way to quickly gauge if you’re ready to stop working, though it’s not a definitive rule.
The best way to truly understand if you’re ready to retire is to talk to a financial advisor.
Retiring is a big step, both for your lifestyle and your finances. Knowing whether the many parts of your life are in a good position to support you stepping away from work will better prepare you to actually enjoy those years you worked so hard for.
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