A 6-Step Guide to Figuring Out When You Can Afford to Retire

Last Updated Jun 23, 2011 2:15 PM EDT

How do you know when you can afford to retire? That's the big question most people ask as they approach their retirement years. The best answer: when you've done the math and the numbers work out. The trouble is, most people just guess at how much money they need to retire -- and they usually guess way too low.

Welcome to the final week of my series, 12 Weeks to Plan Your Retirement. If you've followed the first 11 weeks, you've done a lot of homework. Now it's time to put it all together and crunch the numbers to see if your retirement income will cover your living expenses for the rest of your life, no matter how long you live and no matter what happens in the economy. It's a tall order, but nevertheless, that's what you need to do.

Let's start by planning how you'll balance the magic formula for retirement security:

I > E


Income > Expenses

To get started, you'll need to choose the age at which you want to retire, taking into account your life expectancy and what you hope to do in retirement, as discussed in week one of this series. You'll also need to consider your spouse's life expectancy, if you're married.

Now it's time to see how your projected income measures up to your projected expenses at your desired retirement age. After you do the math, if your retirement income falls below your expenses, you'll need to make some adjustments and keep crunching the numbers until you've determined when you can really afford to retire. You may need the assistance of a professional financial advisor to get it all figured out, as I discussed in week two of this series.

The first three steps in estimating your retirement income involve adding up three things -- your retirement income from Social Security; the income you generate from your IRAs, 401(k), and other retirement savings; and your pension income, if you've earned this type of benefit. Estimating your living expenses is the fourth step. Make sure you've provided for your spouse or partner after you're gone -- that's the fifth step. And the sixth and final step involves the inevitable bargaining and negotiating with yourself to make the numbers work. Most likely that will involve continuing to work and/or taking a close look at your living expenses to see how you can shave them in order to be able to afford to retire.

When estimating your retirement income and expenses, you might want to use an online retirement calculator. Alternatively, you may want to use your own spreadsheet or work with a professional retirement planner.

First, let's address each source of income, starting with Social Security. The buttons to move to the next page follow the links below.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.