Many of us start dreaming of retirement from the first day we start working. It’s a lovely fantasy, but in reality, many of us haven’t saved nearly enough money to retire when we’d like to. How do you know when you can retire?

Bottom Line/Personal:Tom, obviously financial planning for retirement is a very big, complicated topic, but when someone begins to dream of retiring, what is the very first thing that he or she needs to sort out?
Thomas J. Henske, CFPFirst thing, you have to understand what you spend today, because if you don’t understand what you’re spending today, it’s almost impossible to figure out what you’re going to need to be spending in retirement. I don’t fall into the camp that you need 60% of your preretirement earnings in retirement; I just think that there are so many problems with that assumption. Really, you need close to 100% of your preretirement earnings. I also think it depends on where you’re going to live or it might even depend on who you need to take care of. So in today’s day and age, do you need to take care of your kids or maybe even take care of your parents in their retirement?
Bottom Line:Is there some kind of formula…or how do I figure out how much I need to save to be OK when I retire?
Thomas Henske:You figure out how much you need today, then you figure out how are those expenses going to change one way or the other in retirement. Now I like the 4% rule. The 4% rule is what pot of money do I need to accumulate that at 4% will replace those preretirement earnings? Let me give you an example—if you had a million dollars and you were getting 4%, that’s $40,000 of income replacement. Depending on how much you need, that might or might not be realistic. Now you start to rethink—how long am I working for? So maybe it’s not 65 and now it’s 75. Where am I going to live, or what expenses are going to be necessary, absolutely necessary? And which expenses can you do without?
Bottom Line:Is there some optimal time to retire from a tax point of view?
Thomas Henske:Taxes definitely play into it, but I don’t think it’s the big thing to worry about. The big thing to worry about is, do you have enough money? Have you saved enough? Have you accumulated enough money to retire?

The bottom line on figuring out your retirement age—a few things you’re going to need to know. One—how much money are you spending now annually? You have to decide how or if that figure is going to change postretirement. Next, do make sure that you are being conservative in the amount of interest you think that your current savings are going to generate. On average, you want to assume no more than 4%.

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