If you’ve ever wondered How To Retire, today’s post is for you. A summary of the 5 most important steps you need to take as you’re considering retirement.
While these may be 5 “simple” steps, if you do them right they’ll be anything but easy. However, getting the decision correct on when you can retire is an important one, and it’s critical that you check these 5 boxes before finalizing your decision to retire.If you're wondering how to retire, follow these 5 simple steps as you finalize your retirement decision. Click To Tweet
How To Retire in 5 Simple Steps
I started this blog at Age 52 to document my journey to, and through retirement. I retired 3 years after my first post. Through my weekly writing, I figured out how to retire, and how to fit the puzzle pieces together to determine when I could retire without worrying about outliving my money. I’ve shared my journey and lessons learned along the way.
Based on my experience and other articles I’ve read, I’ve boiled down the key steps below, summarized as How To Retire in 5 Simple Steps. I’ve also included “Further Reading” links for each of the 5 Steps to articles written (and free spreadsheets I developed) as I was going through the process myself.
I hope these steps prove helpful for anyone trying to determine how to retire.
1. Determine Your Retirement Lifestyle
During your working years, many of your lifestyle decisions were dictated by your employment. Where you lived, how much you drove, how much travel you were able to do, etc. were all dictated by the need to earn a paycheck.
That changes in retirement, and the important first step in “How To Retire” is to decide what you want your retirement to be. The impact of this decision will impact your spending needs in retirement, which drives how much income you need to derive from your investments. Combined, these determine when you’ll be able to retire.
Figure out your retirement dream first, even if it’s only at a high level.
- Are you going to downsize for retirement? What’s that look like? When will you sell/buy/move?
- Are you going to travel extensively? Internationally or domestic?
- Are you planning to pursue new hobbies?
- What interests you, and how much will it cost?
- What Was I Thinking (When I Was in Your Shoes)?
- Your Plan Is Wrong. Plan Anyway.
- The Good To Great Retirement Series
- Downsizing – Our Retirement Strategy
- How To Downsize in 24 Hours
2. Estimate Your Retirement Spending
In my experience, this was the hardest of the 5 steps. Hardest, but arguably the most important.
Understanding what your retirement will cost is critical as you figure out how to retire. Ultimately, retirement is a math problem and it comes down to determining if you have enough income to cover your retirement spending. If you do nothing else, get this piece right.
I recommend the following approach (it’s the approach I took as I estimated our retirement spending).
- Track your actual pre-retirement spending for a year (feel free to use my free Spending Tracker).
- Adjust your pre-retirement spending to reflect changes that retirement will bring (see the screen shot above).
- Build an annual projection to estimate how your spending will change over retirement (see my Retirement Cash Flow Model).
For example, if you’re planning on downsizing and using your home equity to enter retirement debt-free, you’d eliminate your mortgage payment as one of the “post-retirement” adjustments. Are you going to require private health insurance before Medicare kicks in? Make sure it’s reflected. What about the taxes you’re going to have to pay to access that Before-Tax IRA or 401(k)? Yes, that’s an expense you’ll need to cover in retirement.
You’ll likely have some active years early in retirement (the “Go-Go” years), followed by reduced spending (“Slow-Go”), then an uptick as health expenses increase in your later years (“No-Go”). I found it helpful to map out my Retirement Cash Flow through Age 95 to reflect these variations and took it a step further by creating multiple scenarios. While not required (you could simply look at your spending in Year 1 of retirement), I gained confidence in my retirement plan by extending it through my expected lifespan.
Don’t use a rule of thumb to estimate your spending (e.g., the infamous, but incorrect, “80% Rule”). The retirement lifestyle you’ve designed in Step #1 will drive your spending, and it’s important to get it as accurate as possible.
- When Can I Retire? (Step 1 – Spending)
- How Much Will You Spend In Retirement?
- How Much Can You Safely Spend In Retirement?
- The Ultimate Pre-Retirement Checklist
- Can They Retire? A Real Case Study
3. Determine Your Retirement Income
Finally, in Step 3 of How To Retire, we reach the step that most people think of first. “Do I have enough money to retire?” is a question everyone asks when they’re deciding when to retire. At this point in the process, it’s time to determine how much income you can generate from your life savings.
First, do your homework on any fixed-income sources you’ll receive, including pensions, social security, annuities, etc. If you’ve not yet done it, click on ssa.gov to get a realistic estimate of your Social Security income at various claiming ages. If you’re planning to work part-time in retirement, add in a line to capture any income you expect to earn in retirement (I’d encourage you to be conservative).
Second, if you’ve not yet done so, put together a Net Worth Statement. To see why it’s important, read this article. Feel free to use my free Net Worth Template! (Just make sure to go to “File / Make A Copy” to save a copy onto your drive to allow you to make changes). As you finalize your Net Worth statement, subtract “non-spendable” assets (e.g., cars) from your total to determine the assets you have available to fund your retirement, which we’ll call “Retirement Assets”. The above screenshot from my template (fictitious numbers) shows the process.
Third, multiply your “Retirement Assets” by 3% and 4% (as shown in lines 54 and 55 above) to determine the range of annual withdrawals you can safely make from your investments to fund retirement, shown as $14,130 to $18,840 in the example above (the 3-4% range reflects the range most experts agree you can safely withdrawal from your investments without outliving your money).
Finally, add your fixed income, part-time work income, and investment withdrawals together to determine the total amount of income you can safely expect in retirement.
If you’d like to read more details on the process, read this post (it’s the approach I used when I was determining our retirement date).
Once you’ve totaled your expected income, compare it to your expected spending. If you have sufficient income to cover the spending, you’re ready to retire (actually, you still need to complete Steps 4 and 5, but your finances are sufficient to support your retirement).
If your income is insufficient, you can project how many years of additional savings will be required to increase your income to the required level. You can also revisit your spending assumptions to see if there are any adjustments you can make to reduce your spending number and retire earlier.
At this point, by modifying the savings and spending assumptions, you can determine your retirement timing, perhaps the most important decision in the “How To Retire” question. I’d also encourage you to run your numbers through various retirement calculators to provide different perspectives on your numbers.
- When Can I Retire? (Step 2 – Income)
- How To Build A Retirement Paycheck (The Bucket Strategy)
- Should You Take Social Security at Age 62 or Age 70?
- How To Retire in 15 Years (Regardless of Your Age)
- It’s Never Too Late To Start Saving For Retirement
4. Build Your Defenses
In your final year before retirement, it’s important to modify the way you manage your investments. Moving into the Withdrawal Phase of retirement requires a different strategy than you’ve used during the Accumulation Phase, and now is the time to make that transition. The following are the key highlights, I encourage you to dig into the “Further Reading” at the bottom of this section if your retirement is less than 2 years away.
Withdrawal vs. Accumulation: In retirement, you’ll be withdrawing from your savings, rather than adding to them. Use a system to build a retirement paycheck, which automates your withdrawals and keeps you within your spending limits.
Avoiding Sequence Of Return Risk: Sequence of Return Risk refers to the risk of having to sell your stocks in the midst of a bear market. To avoid this risk, consider modifying your Asset Allocation to ensure you have sufficient liquidity to cover a minimum of 2-3 years of expenses without having to sell stocks. I use The Bucket Strategy to maintain 3 years of cash and an additional 5 years of bonds. There are alternative approaches, what’s important is that you implement a plan that works for you.
Develop a Drawdown Strategy: It’s important to determine what assets you’ll be drawing from, and in which order. Ideally, you’d like to keep your Roth investments in place as long as possible, allowing tax-free growth. See Our Retirement Investment Drawdown Strategy for details on our strategy.
Maintain A Safe Withdrawal Rate: As mention in Step 3 above, most experts recommend withdrawing no more than 3-4% of your portfolio per year to ensure you don’t outlive your money (adjusted annually for inflation). At a minimum, implement an Annual Financial Review to ensure you’re staying within your spending limits.
- Beware Inflation: While it’s been tame for years, don’t forget the risk of Inflation: The Silent Killer of Retirement. As you manage (and rebalance) your Asset Allocation over the years, ensure you have sufficient exposure to categories which will allow you to grow your portfolio on par, or better than, the rate of inflation.
Minimize Taxes: Remember all of those tax savings you enjoyed when you contributed to your Before-Tax IRA or 401(k) during your working years? Accessing those funds will trigger a tax bill, and it’s best to have a strategy to minimize the tax expenses over the course of your retirement. Before the Required Minimum Distribution (RMD) is triggered at Age 72, consider doing annual Roth Conversions.
- Maintain Your Health: One of your biggest expenses in retirement will be Health Insurance, so do what you can to keep yourself healthy. Take advantage of your newfound time to implement a regular exercise program. Do an annual health screening, and monitor developments in the health insurance industry closely.
Do An Estate Plan: The one reality that none of us can avoid is that we will die someday. Don’t deny it, and don’t fret about it. Enjoy living your life, but build an appropriate plan to ensure that your desires are implemented when that time comes. Put a solid Health Care Directive in place, update your Will, get the appropriate Power of Attorneys in place, etc. Legal Zoom has an entire section on Estate Planning. If you aren’t comfortable doing it yourself, schedule an appointment with an attorney.
- How To Build A Retirement Paycheck From Your Investments
- 20 Steps To Take In The Year Before Retirement
- Our Retirement Investment Drawdown Strategy
- A Step-By-Step Guide For Your Annual Financial Update
- How Much Can You Safely Spend In Retirement
5. Develop Your Retirement Passions
While many people focus on the financial aspects of retirement planning, I’ve discovered that it’s really the non-financial aspects that will make your retirement a rewarding experience. Don’t complete the “How To Retire” process without spending as much time as possible thinking about the “softer side” of your retirement. It was the primary theme of my book, Keys To A Successful Retirement, and has consumed the majority of my writing since retirement. In your final year of work, start “building a bridge” to those activities which will become important in your life post-retirement. Start some new hobbies, make new friends outside work, get involved in a local charity.
For some reason, people often overlook the importance of this step. Don’t be one of those people.
Retirement is the time to pursue your dreams, but it’s also a time when your risk of depression increases. The primary difference between those who struggle in retirement vs. those who enjoy the transition is this step. I could write pages on this one (I already have), but I’ll leave it at that. I’m listing a lot of articles under this one, and I encourage you to read at least 2 that are of interest. I can’t reiterate the importance of this step, don’t complete your “How To Retire” process without spending as much time as possible on Step #5. Please.
- How To Move Your Retirement From Good To Great (A 4 Part Relocation Series)
- The Veteran
- The 10 Commandments Of Retirement
- A 10 Day Retirement
- 5 Milestones To Determine “When Can I Retire?”
- Unprepared For Retirement
- Purpose, Motivation And Life Aspirations
- Will Retirement Be Depressing?
- Before I Die
- Time Affluence
- Achieving A Dream
- 4 Challenges To Improve Your Retirement
- 5 Reasons Why Retirement Is Hard
- A Simple Tip For A More Enjoyable Life
There you have it, How To Retire in 5 Simple Steps. I’m convinced that anyone who follows these steps in their final years of work will enjoy a more rewarding retirement as a result. If you’re getting serious about retirement, I encourage you to work through these steps as you finalize your retirement decision. Your life will be better as a result.
By design, this article is a simplified overview of the steps you’ll need to work through as you figure out how to retire. If you’d like to dig deeper, here are some related “mega-posts” which follow a similar approach of linking to related topics.
- The Ultimate Retirement Planning Guide
- The Ultimate Pre-Retirement Checklist
- 20 Steps To Take In The Year Before Retirement
- 5 Steps to Take Within 5 Years of Retirement
Your Turn: Are you trying to figure out How To Retire? Were these steps helpful, or are there other areas you’re struggling with? If you’ve already retired, what additional steps did you take that others should consider? Let’s chat in the comments…