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Do you have enough money to retire? Three questions to consider

Do you have enough money to retire? Three questions to consider

There are clearly more than three questions when considering whether you have enough money to retire. Some obvious ones being:

- How much will I spend each month and year once I'm retired?

- To what age do I think I will live?

- What amount do I currently have saved and invested?

- What will investment returns and inflation be during my retirement?

- Will I get income from social security or a private pension? If so, how much, and from what age?

With this information to hand, you can head to Google, find some recommended retirement calculators and figure out whether you have enough money saved and invested to retire now, or get an estimate of how much more you need to save. I hope you get a pleasant surprise and are closer to early retirement / financial freedom than you think.

Then there are a few other questions that perhaps don't get talked about as much, but in my view are also worth thinking about.

  1. Should I plan to leave an inheritance?

  2. If I own my house, should I include it's equity value in my money available for retirement?

  3. Do I need to be sure my money will last for my whole retirement?

As is often the case, there is not a hard and fast answer to these questions, but let's have a look at them in a bit more detail.

Should I plan to leave an inheritance?

Clearly it's a personal decision, and we may have different views on it.

My most important and therefore first point of reference is my thinking towards my parents. My mother is unfortunately no longer with us, but my father is still going strong, and I'm sure has lots of years ahead of him. For me it's simple, I want him to enjoy those years, and to do what he wants during them without constraint. I would hate to think that he may pass up doing something because he was trying to protect an inheritance for me. I've tried to think of one of my friends who thinks differently to this, but I can't.

Also, as you are reading this post, I take it that you are clearly a person of sound principles and good judgement😜. That being the case, if you have children, you will have raised them well and prepared them for the exciting life that they have ahead of them. Because of this, they will do well, they will be a success and they will enjoy their life. They don't need an inheritance to do this.

And quite possibly, it will turn out that there will be something left for them anyway. In my case, I tend to be conservative, so I built some insurance into my financial plans. Whether it turns out that I don't live for quite as long as I've allowed for, or that I spend less as I get older (research says that's likely), there most probably will be something left to pass down to my children. It's not that I'm planning it that way, but I suspect that's how it may turn out.

So my vote is that there is no need to plan to leave an inheritance. You've earned and saved your own money, so use it for your own (hopefully early) retirement. The love, support, handholding and possible babysitting that we provide throughout our kid's lives is worth a whole lot more than money.

Should I include home equity in retirement fund?

If I own my house, should I include it's equity value in my money available for retirement?

I'm pretty sure that the answer is either yes, no, some or it depends. Oh, that's seems a bit confusing, so why is that and what are the options?

It's not necessarily all about money, but emotions and security can also factor. If you have been in the house a long time then it most likely has a lot of memories attached to it. Perhaps you raised your kids in the house, had various celebrations, like the neighbours and neighbourhood etc. In early retirement, moving may seem OK, but as we get later into retirement, the thought of moving may be quite daunting. These are some of the non financial reasons why you may not want to include your home equity in your retirement calculation.

On the other hand, your home is quite possibly your biggest investment/asset, and could be used to help you retire earlier, and do some of the things that you dream of. There are a number of options here. Downsizing, if you had kids and a big family house, do you still need this now that the kids have left home? Downsize to a cheaper property and release some equity for your retirement pot. Or how about moving to a lower cost neighbourhood, perhaps you don't need to be so close to the city in retirement? As well as releasing equity for your retirement fund, these options will most likely reduce your monthly costs, with lower bills and taxes.

Another way of using your home equity available for retirement is via a reverse, equity or lifetime mortgage. There are some different types available, but generally I am thinking of the type that releases all or part of your home equity to you and allows you to stay in your home for the rest of your life. You'll need to consider the fees and decide whether this is worth it for you. And of course it means that your house (or certainly not the full value) will not remain for you to pass on to your kids or relatives. This option will get a bad review from some, but maybe it's worth looking at and deciding for yourself based on your own circumstances and your own dreams.

What did I do here? Kind of a mixture. I have left home equity out of the money that I count as available for retirement, but note that we have downsized already. I've therefore already taken account of the fact that now it is just Sally and me, we don't need a house as big as when the kids were at home. I also view the remaining home equity as a bit of an insurance policy - although I don't expect that we'll need it, if money did get tight as we progress through our retirement then I can release some or all of the remaining home equity to top up our retirement income.

Do I need to be sure my money will last for my whole retirement?

You would think that the obvious answer has to be yes, you do have to be sure. But how do you make sure, and does that make sense?

For most people, making sure probably means to keep on working for another one, two, five or ten years to keep on saving money for the retirement fund. I'm not unhappy with my retirement date (aged 47 is pretty good I reckon), but I did put up with the pressure and the stress at work for some extra years to keep topping up the pot to try and ensure it would be enough.

That's fine as long as you're enjoying work and don't feel that you are missing out, because each extra year at work is one year less of early retirement.

But if you're really not enjoying work, or just can't bear to delay early retirement for another year, but aren't quite sure that you have enough saved in your retirement fund, is it the end of the world? I think the answer is probably not, and here's why:

  • Firstly, you're not saying that you haven't got enough, you're just not sure. It may well be that the retirement funds that you have will see you through your retirement just fine.

  • Studies show that as we get older we tend to spend less, so that may mean that your retirement fund may last longer than you think. And if things do seem to be getting a bit tight, then there are ways to cut monthly costs, and done smartly these don't have to cut monthly enjoyment.

  • It may be that you have some other assets that you had not included in your retirement fund that can be called upon. Perhaps there is equity in your home that could be released in the ways discussed above.

  • And if you find later that you are short of funds, there are ways to supplement. Whether by working again or finding a side hustle later on, there are always ways of making some income. And the important thing to remember is most likely you are just needing to top up your income, so it might mean you need to do just one or two days work a week, not five. Remember that by deciding to retire early, you'll take five extra days off each and every week during your early retirement, and I trust you'll enjoy them, and if there is an outside chance that you have to work one or two days extra later on, then that's surely not such a bad deal.

As I was an accountant before my early retirement, this section feels a bit weird. I guess I was programmed to be cautious and to make sure that my money would last for my whole retirement. But I'm starting to think that by being too cautious you may miss out on some wonderful early retirement opportunities. Mid next year, I'm planning on travelling, something that I'm equally excited and scared about, but I'm going to do it. If I were to work for another five years to keep topping up the retirement fund would I still go travelling in five years time? Maybe, but maybe not. In five years things may change and the opportunity may be gone, simply because I chose to be extra cautious.

I'm not suggesting that you should be reckless, but these are three things to think about that could bring forward your early retirement or financial freedom date.


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