Retiring During a Recession

Retiring during a recession is the same as retiring at any other time, but with a LOT more caution and thought.

Many of the decisions about what you can and can’t do in retirement will be based on your financial situation. Some people may have enough money to live their dream lifestyle, but even more will struggle to maintain their current quality of life, especially if their financial situation changed dramatically just prior to retiring.

Because of unforeseen circumstances, many people are thinking that they will need to work until they are 70 or 75 and some might be thinking that they won’t ever be able to retire.

The basic question is “How Much is Enough”? How much do I need to live on when I retire? What is my income when I retire? How long will my savings last? What happens if the stock market crashes…?

Everybody you ask will give you a different answer and their answer probably won’t be your answer. So how do you make your own personal calculations to determine when you are financially able to retire?

Start by looking at your current budget to eliminate what you won’t be spending when you retire. You may no longer need lunches out, or dry cleaning or parking or tolls. Whatever is in your current budget, figure out which expenses disappear when you retire.

At the same time, calculate the additional expenses you will incur in retirement. You might not have work related expenses, but what about vacations with the grandkids? What about increased medical expenses? Do you need to consider the costs for moving to a different location?

Next, determine what your income will be on a monthly basis. Log on to “SSA.gov” and click on My Social Security to see what your monthly benefits will be.  If you are eligible for a monthly pension from your employer, add that to your monthly income.  Do you have any other source of income available to you? If you are married be sure to do the same exercise for your spouse to calculate a total monthly household income.

After you add up all of your monthly income, compare that to your monthly budgeted expenses. The difference between your known income and your known expenses is the amount you’ll need to withdraw each month from your savings or investments to supplement your income and meet your budget expectations.

After you calculate the monthly amount you need to withdraw from savings, multiple it by 12 to calculate the amount you plan to withdraw each year. Estimate the remaining number of years you hope to live and multiply that by your yearly withdrawal.  For example, if you’re 60 now and you think you will live until 90, multiply your annual savings withdrawal by 30.  That is how much money you should have in savings when you retire.

Here’s another eye-opening way to look at it. After calculating income, expenses, and monthly savings withdrawal, divide the total amount you currently have in savings/investment accounts by the amount you need to withdraw on a monthly basis. The result is how many months your savings will last in retirement based on the budget you created.

Here’s an example.  If you have $100,000 in retirement savings and you need to withdraw $1,000 a month to cover your budget shortfall, your savings will provide enough money for 100 months, or 8 years and 4 months. If your savings decrease in value, you’ll run out of money sooner than 8 years and 4 months.

Time to go back and relook at the budget. Pare it down to the items that are absolutely necessary. Be sure you understand your needs versus your wants, and you are calculating a reasonable budget amount.

If you are ready to retire but not eligible for pensions or social security, a down market can be devastating. Taking money out of your savings when the market is at a low point means you are selling your potential future growth. Your savings/investments will rapidly diminish. The ideal would be to work for another year or two until the market reverses direction and you can build a cash cushion.

This gives you a chance to save even more and allows you to maintain the integrity of your savings and investments. It may provide you with an even better retirement than you expected.

Everyone understands the stock market rises and falls in cycles over the years. Yet when it comes time to plan for retirement, this basic fact can be very hard to deal with. If the market drops right before or after you retire, you could find yourself with a far smaller retirement nest egg than you had anticipated.

Retiring well takes effort and dealing with unforeseen circumstances makes it even harder. Nevertheless, with some forethought, you can put yourself in the best position possible to deal with unexpected surprises and come out on top.

Ecclesiastes 3:1 tells us, “There is an appointed time for everything.” If you are thinking about retiring, be sure to do the math to see if you are in good shape or not. But, no matter how much math you do there’s no guarantee that things will turn out the way you planned.  Do the best you can to plan for the future, and leave the rest to God!  

Join us on the Compass Catholic podcast for a discussion about retiring during a recession.