How Do I Know If I Can Afford to Retire? Your Answer In 3 Steps

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You're thinking about retirement, and one question keeps coming up: How do I know if I can afford to retire?

Maybe you've wondered whether you can retire on a specific amount of money. Or perhaps retirement is still 10 to 15 years away, and you're not sure how to determine whether you're on track.

If you're a Gen Xer, you might be asking these questions while juggling your current expenses, saving for retirement, paying down debt, and trying to enjoy life today. You know you need to plan for retirement, but figuring out how much money you'll actually need can feel overwhelming.

Here's what I want you to understand: Knowing whether you can afford to retire involves more than calculating a retirement number. You also need to understand what it costs to support your life today, how those expenses will change in retirement, and how you'll manage your money when your paycheck stops.

In this episode of Wealthy After 40, I'm sharing three steps to help you get your money in order today so you can move toward retirement with greater clarity and confidence.

Why Your Retirement Number Doesn't Tell the Whole Story

When you ask, "Can I retire on this amount of money?" you're looking for a number that tells you everything will be okay.

But there's a problem with relying on that number alone.

You might have a financial advisor who calculates how much you can withdraw from your retirement portfolio each month. The numbers might look good on paper, but if you don't understand how much money your lifestyle actually requires, you could still feel uncertain about whether you can afford to retire.

I've worked with a client who found herself retired sooner than expected because of circumstances beyond her control. Her financial advisor confirmed that her portfolio could support a certain monthly amount. Yet, once she began living on that money, she felt like something wasn't adding up.

The disconnect wasn't necessarily her portfolio. She needed a clearer understanding of what I call her cost of your reality: the true cost of supporting her life, including expenses that didn't happen every month.

Once we worked through her finances, we could identify a more accurate amount and explore adjustments to help her make her money work for her.

This is why retirement planning needs to start with your money today, not just a projected balance for tomorrow.

Step 1: Understand Your True Cost of Living Before Retirement

The first step toward becoming retirement ready is understanding your current financial picture.

You might be thinking, "I already know how much I spend every month."

But do you know how much it costs to support your life over an entire year?

There's a difference.

Look Beyond Your Monthly Expenses

Most people are pretty good at identifying their regular monthly bills. You know what your mortgage or rent costs, how much you spend on groceries, and what your utilities typically run.

The problem is that many expenses don't happen monthly.

Think about the expenses that show up throughout the year:

Property taxes and homeowners insurance
Homeowners association (HOA) fees
Medical bills and other healthcare expenses
Home repairs and appliance replacements
Furnace or air conditioner maintenance
Vehicle repairs and maintenance
Gifts, holidays, and travel

These are irregular expenses. They might happen once a year, a few times a year, or whenever something needs attention.

And because they aren't part of your regular monthly bills, they're easy to overlook when you're trying to determine how much money you need.

But they still have to be paid.

If you don't account for them, you might believe your monthly expenses are lower than they actually are. Then, when a large bill arrives, you scramble to cover it or pull money from savings.

That's not a reliable way to manage your money, especially when you're preparing for retirement.

Calculate Your Cost of Reality

Your cost of reality is the amount it truly takes to support your current life.

To calculate it, start with your regular monthly expenses. Then, add up your irregular expenses for the year and divide that amount by 12.

For example, if your irregular expenses total $12,000 annually, that's equivalent to $1,000 per month.

That doesn't mean you'll spend exactly $1,000 on irregular expenses every month. It means you need to account for that amount in your overall cash flow management so the money is available when those bills arrive.

When you bring these expenses into your monthly financial picture, you begin to see what your lifestyle really costs.

And that's valuable information for retirement planning.

You can't confidently plan for a retirement lifestyle if you don't understand what your current lifestyle costs.

Step 2: Determine How Your Retirement Lifestyle Will Change

Once you understand your current cost of reality, you can begin to explore what will change when you retire.

This is where budgeting for retirement becomes more specific to you.

You don't need to start with a generic retirement calculator or assume your expenses will increase or decrease by a certain percentage. Instead, look at your actual life and consider how your spending might change.

Identify the Costs of Working That Will Disappear

Start with expenses you may no longer have once you stop working.

For example, if you commute to an office every day, you might spend less on fuel and vehicle maintenance.

If you have a work wardrobe, you may spend less on professional clothing. You might also spend less on lunches out or other expenses associated with your workday.

These changes may not seem significant individually, but together, they can affect how much money you need in retirement.

The goal is to identify the expenses that will genuinely change based on your circumstances.

Don't assume every expense will disappear just because you're no longer working.

Add the Costs of Your Retirement Lifestyle

Now, let's talk about what you want your retirement to look like.

Maybe you plan to travel once or twice a year. Perhaps you want to spend more time pursuing hobbies, visiting family, or enjoying activities you've put off while working.

Or maybe your ideal retirement looks remarkably similar to your current life, with more flexibility over how you spend your time.

There's no right or wrong answer.

The important thing is to identify the changes you anticipate and consider what they will cost.

If you want to travel more, include those expenses. If you expect to spend more time at home, think about how that might affect your utilities, hobbies, or other spending.

This is especially important for Gen X retirement planning because you're not simply trying to accumulate money. You're working toward a life you want to be able to afford.

Don't Forget Healthcare Costs

Healthcare is another important consideration, particularly if you plan to retire before age 65.

You may need to pay for health insurance before becoming eligible for Medicare. And even after you become eligible, Medicare isn't free.

Depending on your circumstances, you'll need to account for premiums, deductibles, out-of-pocket costs, and any supplemental coverage you choose.

Your healthcare expenses will depend on your situation, so research the coverage and costs that apply to you.

The goal isn't to predict every future expense perfectly. It's to build a realistic estimate based on what you know today and recognize where adjustments may be necessary.

Create Your Retirement Cost Picture

At this point, you should have two important pieces of information:

What it costs to support your current lifestyle.
What you expect to change when you retire.

Together, these give you a much clearer starting point for determining how much income you'll need.

This is also where retirement planning for couples becomes particularly important. You and your partner may have different expectations about travel, spending, healthcare, or when each of you wants to retire.

Talk about those differences now. Understanding what matters to each of you helps you build a retirement lifestyle that reflects your shared priorities rather than relying on assumptions.

Your retirement number becomes much more meaningful when it's connected to the life you actually want to live.

Step 3: Build a Money System That Supports Retirement

You now understand your current cost of reality and have identified the changes you anticipate in retirement.

The third step is creating a money system that supports the transition.

Why does this matter?

Because managing money while you're working can look very different from managing money in retirement.

Today, you may receive a paycheck every two weeks or once a month. You know when the money arrives, and you've built your financial routines around that schedule.

In retirement, your income may come from several sources, such as Social Security, retirement account withdrawals, pensions, or other assets.

You need a way to understand how that money will flow through your life.

Make Room for Monthly and Irregular Expenses

A retirement-ready money system helps you see what needs to be paid, what money needs to be set aside, and how much is available for other priorities.

I worked with a couple who came to me after their financial planner asked how much they spent each month to help determine whether retirement was affordable.

They had previously budgeted but stopped after having children and becoming busy with their careers. They knew they could figure things out themselves, but they didn't want to spend the time doing it.

One of their biggest challenges was managing large annual bills. Property taxes and homeowners insurance each created significant financial stress because the payments came due in consecutive months.

After joining my Retirement Ready coaching program, they built a system to track their monthly spending and prepare for those irregular expenses. They also created dedicated savings buckets for travel, medical costs, gifts, and home repairs.

Ten months after their first session, they shared that they were in an amazing place financially. Their large annual payments were set aside, their savings buckets were filling up, and they felt more at ease about where their money was going.

That's what a supportive money system can do.

It helps you move away from reacting to expenses and toward preparing for them.

Give Yourself a Way to See and Adjust Your Progress

Your money system shouldn't be something you build once and never revisit.

As you approach retirement, your circumstances may change. Your expenses may shift, your retirement date may move, or you may discover that your original assumptions need adjusting.

A good system helps you see those changes and make informed decisions.

It also gives you a way to connect today's decisions to your longer-term retirement goals.

When you understand your cash flow, you can identify opportunities to save more, manage debt, or adjust spending without automatically assuming you need to sacrifice the lifestyle you enjoy today.

You can see where your money is going and decide what needs to change to make retirement possible.

Your Retirement Starts With the Money Decisions You Make Today

So, how do you know if you can afford to retire?

Start by understanding your true cost of living, identify how your expenses will change when you retire, and build a money system that supports your transition.

You don't need to have every detail figured out today. But you do need a clear starting point.

Your retirement number matters, but it becomes far more useful when you understand the lifestyle that number needs to support.

And here's the encouraging part: You don't have to wait until retirement is right around the corner to start figuring this out.

The work you do today can help you make better decisions, prepare for future expenses, and recognize where you have opportunities to improve your retirement outlook.

Get your money right today, and you'll be better prepared for retirement tomorrow.

Ready to Take the First Step?

If you're wondering which areas of your current finances need your attention, download my free Retirement Ready Checklist.

It will help you identify where to focus so you can start connecting today's money decisions to the retirement you want.

Because retirement isn't just about having enough money. It's about building a life your money can support.

Download Checklist Now