- Retirement takes a lot of planning.
- If you’re still paying off debt and putting off saving for retirement until later in life, retiring may be further away than you like.
- You may also need to delay retirement if you’re putting all your eggs in one basket. Relying on just Social Security or an employer-sponsored retirement plan isn’t enough – you need a diversified retirement portfolio, according to experts.
There are a few questions you should ask yourself before deciding whether you’re ready to retire.
One of those has to do with how much money you’ve saved. Even if you’re emotionally ready to say goodbye to the 9-to-5 and know exactly what kind of lifestyle you want, retirement isn’t very feasible if your finances aren’t in shape.
If you haven’t saved enough money to get you through your golden years, you’ll probably need to delay retiring.
Here are seven ways to tell if you may not have enough money to retire.
1. You're not near your desired retirement savings goal.
There's a simple way to calculate how much money you need to save to retire: divide your desired retirement income by 4%.
For example, if your perfect retirement salary is $40,000, divide it by 4%, or 0.04, and you get $1 million. If it's $80,000, divide it by 4%, and you get $2 million.
If you have enough saved up, you should be able to withdraw 4% each year to pay for living expenses in retirement. Using the 4% withdrawal strategy requires earning at least a 5% investment return annually (after taxes and inflation) on your retirement savings, according to Business Insider's Lauren Lyons Cole, a certified financial planner.
If your savings isn't close to what you need to live off your perfect retirement salary every year, you may have a ways to go before retiring.
Read more: What to do in your 20s, 30s, 40s, and 50s to retire with $1 million, according to financial planners
2. You're still paying off debt.
Not all debt is considered bad, but even good debt can turn bad if you've been making late or incomplete payments.
Financial experts typically advise prioritizing paying off high-interest debt. If you're still paying off a credit-card bill or consumer loans with high interest, it's likely you're more focused that than saving for retirement.
"The more debt you carry into retirement, the more retirement income you'll need to pay off what you owe," Cameron Huddleston of GOBankingRates said. "When you're deciding when to retire, you need to figure out how long it will take to pay off your existing debts."
Scott Bishop, the director of financial planning at STA Wealth, told Huddleston that you should first pay off any high-interest debts that aren't tax-deductible, such as credit-card balances. If you have good credit, refinance any high-interest debt that's tax-deductible, such as a mortgage, to get the lowest rate possible, he said.
But Debt.org advises saving for retirement before paying off debts if you're nearing retirement age and have a relatively small debt, or your employer offers to match your 401(k) contributions, Laura Woods of GOBankingRates said.
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3. You put off saving for retirement.
When it comes to saving for retirement, it's better late than never. But saving early is the best thing you can do for your retirement account, thanks to the power of compound interest.
When you start saving, your original pot of money earns interest over time, creating more money in your account that accrues even more interest. The little bit of interest early on can make a big difference.
For example, a hypothetical person, Susan, invests $5,000 annually from age 25 to age 35 for a total of $50,000; assuming a 7% annual return, she'll have $562,683 saved by the time she retires at 65.
If Bill invests $5,000 annually but doesn't start until 35 and keeps it up until age 65, for a total of $150,000, he'll have $505,365 saved by retirement.
"Whatever situation you're in, it's never too late to start growing, maximizing and safeguarding your retirement income - there are always things that can be done," Nigel Green, the founder and CEO of the financial consultancy DeVere Group, told MainStreet. "But the time to act is now as the longer you put off planning for your retirement, the harder it becomes."
4. You're too dependent on Social Security.
Social Security doesn't look as promising as it once did. The trust funds are projected to run out in 2033, in which case the retired person would receive only 77% of scheduled benefits.
Social Security benefits represent about 38% of the income of older people, with an average monthly benefit of $1,294, Woods said, adding that Social Security is an added benefit, not something to rely on.
5. You haven't been taking advantage of employer-sponsored retirement plans.
Many employer-matching retirement programs, like 401(k)s, match up to 3% or 4% of each paycheck at 50% or 100% of the contributed amount, Thomas Walsh, an investment analyst with Palisades Hudson Financial Group, told Jason Notte of MainStreet.
But having a small amount taken out of your paycheck each month isn't the best way to achieve comfortable retirement.
"As your salary increases, try to maintain the same standard of living while increasing your retirement plan contributions," Walsh said. "Not only will the amount deducted from your paycheck escape income tax until retirement, the investments held in your account grow tax-free until the funds are later needed as well."
These tax savings can benefit from compounded growth, making a big difference in future retirement income, Notte said.
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6. Your retirement portfolio isn't diversified.
If you're taking advantage of employer-sponsored retirement plans, all the better - but you shouldn't put all your eggs in one basket.
"With the grim outlook on the future of Social Security and pension plans becoming a thing of history, relying on your employer's retirement plan to fund your golden years may just not be enough anymore," Walsh said. "Contributing to an employer plan such as a 401(k) is a great start for retirement saving, but the more you can save for the future, the better."
You should also be contributing to a private retirement plan like a traditional or Roth IRA, he said. If you're not, you may not be maximizing your retirement savings.
Huddleston described experts as saying your investment portfolio should include various asset types and be structured to outpace inflation, with a mix of stocks to maintain growth and fixed income like bonds to guard against market volatility.
7. You've borrowed from your retirement savings.
It's equally important to not dip into those retirement accounts early. According to Woods, an early withdrawal may be beneficial now but can hurt your long-term financial health.
"You'll need to develop an aggressive savings strategy to try and get caught up again," she wrote.
Early withdrawals from an IRA under age 59 1/2 not only put a dent in your retirement funds but incur penalties and taxes. If you've already withdrawn, think twice before doing so again.
"If you need money, the last place to go for it is your IRA," said Neal Frankle, a CFP.
"Once you start putting your fingers in that IRA cookie jar, you might be opening Pandora's box. If you need the money for an investment, it might be an investment you don't need to make," Frankle said. "If you need the cash for an emergency, look for other options - any other option. But at the end of the day, if you do use your IRA money, please be aware of the tax consequences and the precedent you might be setting."