Wondering whether you can realistically afford to retire? Run a retirement dress rehearsal by living on your projected retirement income while you are still working. This exercise can reveal budget problems while you still have time to correct them.
Start by calculating your monthly retirement paycheck. Add your expected guaranteed income, such as Social Security and pension benefits, to your planned portfolio withdrawals. Estimate the after-tax annual amount, then divide it by 12. Use take-home dollars because that is what will actually be available for living expenses.
Beginning the following month, live on exactly that amount. Transfer the difference between your current paycheck and projected retirement income into a separate account that you do not use. This allows you to experience the financial constraint instead of simply modelling it on paper.
Track every expense for 12 months, including:
- Housing, utilities, groceries, and transportation
- Healthcare and insurance premiums
- Travel, entertainment, and hobbies
- Taxes and debt payments
- Home and vehicle repairs
- Gifts and family support
- Annual subscriptions and memberships
- Other irregular or unexpected costs
A full year is helpful because monthly budgets often overlook property taxes, insurance renewals, holiday spending, medical bills, major repairs, and other expenses that do not occur regularly.
Review the results honestly. Separate one-time purchases from ongoing spending patterns. If you remained under budget, ask whether the spending reduction was sustainable or whether you postponed necessary purchases simply to pass the test. A rehearsal that does not reflect your real lifestyle will not provide reliable results.
If the plan does not work, adjust it before retirement becomes permanent. Possible changes may include working longer, reducing selected expenses, delaying Social Security, working part-time, increasing savings, or revising your withdrawal strategy.
The real value of a retirement dress rehearsal is that it turns a vague concern such as “Can I afford to retire?” into a specific problem. You may discover, for example, that your projected spending is $11,000 above your annual retirement income, primarily because of travel and healthcare costs.
Specific problems can be addressed. Vague fears only create uncertainty.
Even three to six months of real spending data can expose unrealistic assumptions, but completing the exercise for 12 months provides a fuller picture of seasonal and irregular expenses.
If this is your first time with me, I’m Elizabeth.
• I help women navigate taking over the finances after widowed, divorce or illness
• I help people comfortably retire 10 years early
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