Have I saved enough to retire?

August 17, 2023 | David Edmisten, CFP®

Have I saved enough to retire?

This is the first and most critical question to answer and first one all potential retirees must answer. Do I have enough money to leave my job and not risk running out of money? There are many great basic tools online, such as retirement calculators, and some common calculations that can help you begin the process of confirming if you have saved enough.

One of the most often quoted rules of thumb is the 4% rule. Developed by financial advisor William Bengen in 1994 in his paper, "Determining Withdrawal Rates using Historical Data"(1) this rule states that if you invest in a typical 60% equity/40% fixed income balanced portfolio in retirement, you should be able to withdraw 4% of your balance, plus inflation, each year throughout retirement without running out of money. Bengen's study found that most portfolios would last for a 30-year retirement period.

But it is as simple as this basic rule of thumb? 

For early retirees, the answer gets much more complicated. 

First, if you are planning to retire early, you'll have less years to earn and save for retirement, and more years to take withdrawals, compete with inflation and more variety in market conditions, all of which will impact your ability to never run out of money. There are also more years where changes in tax laws, healthcare costs and in your personal needs and situation may have a greater influence on your withdrawal needs and your ability to maintain a surplus nest egg throughout retirement.

Additionally, early retirees may not yet have access to pension and social security benefits, or even withdrawals from tax deferred accounts like a 401k or IRA without tax penalties, depending on the age one retires. 

For these reasons, working with a CERTIFIED FINANCIAL PLANNER™ with expertise in retirement planning for younger retirees is critical to develop a plan that can be stress tested and allow you to enter early retirement with confidence.

The second key question to answer is "Where will my retirement paycheck come from?"

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(1) "Determining Withdrawal Rates Using Historical Data", William Bengen, 1994.

About the Author:

David Edmisten, CFP®, is the Founder of Next Phase Financial Planning, LLC, a financial advisor in Prescott, AZ. Next Phase Financial Planning provides retirement, investment and tax planning that helps corporate employees retire with both financial and lifestyle security.