Are you ready to retire?
Do you want to skip work and focus on the things you really care about full time?
Maybe it’s golf, boating, or spending more time with family?
First off, congratulations!
Second off, how’s that going?
If you’re like most people, making the decision to retire can be one of the hardest decisions you’ll ever make. For good reason, your future is on the line!
Most folks don’t know the answer and find themselves losing sleep over it versus having clarity.
You probably have savings tucked away, you’re getting social security or you have a pension. You just haven’t gotten a final answer of whether or not you’ll have enough to retire.
That’s what we’re going to help you with today. It’s time to get your answer!
A Simple Calculation for Figuring Out How Much You Need.
I’ll walk you through a “Do It Yourself Exercise” that will help you decide if you’re ready to pull the trigger on retirement.
Don’t stick your head in the sand and push out retirement simply because it seems like too much work to figure out the answer to this question.
There is a surprisingly easy way to know the answer using simple math.
The only difficult part of this exercise is figuring out the correct inputs to the equation like how much money your family spends every month.
Here’s what information you need to know.
Let’s get started with a few key questions.
At retirement, how much income will you receive from:
- Monthly pensions?
- Social security payments?
- Other forms of income?
The next hard question is how much do you truly spend each month. This doesn’t just include your mortgage and utilities, but also includes any discretionary spending on hobbies or going out to eat.
- What are your base expenses including mortgage, cars and utilities?
- What are your discretionary spending numbers?
Once you know your total monthly income and your total monthly expenses, simply subtract the income from the expenses to see how much money you’ll need to withdraw monthly from investments, such as a 401(k).
For example, if your social security payment is going to be $1,500 per month, your pension is going to be $2,500 per month, and your expenses are $5,000 per month, then $5,000 – $1,500 – $2,500 = $1,000 per month that needs to be withdrawn from your investments.
Expenses – Social Security – Pension = Your Investment Income Needs.
That brings us back to the original question, do you have enough saved to make that last?
That depends on your investment allocation and the length of time you will be retired.
We generally make the decision of how much you can withdraw on an annual basis based on sophisticated modeling software, but, a good rule of thumb is that if you are going to be retired for 30 years, then 3% is a conservative estimate, whereas if you are going to be retired for only 20 years, then 4-5% can be successful.
Success, in this instance, means that you don’t run out of investable assets before the end of retirement.
In our original example, you need $1,000 per month on top of your income.
If we assume a 30-year retirement, you need $1,000 x 12 months = $12,000 per year from your investments.
At a 3% distribution rate, you need investable assets of $12,000/0.03 = $400,000.
For a 20-year retirement, $12,000/0.05 = $240,000 is needed at a 5% distribution rate.
You can see how the length of time you will be retired for affects your savings need. If you haven’t saved enough, you can delay retirement which will allow you more time to save.
Delaying retirement also means you can take a higher distribution at that time.
This exercise gives you a pretty good idea of whether you’re in the ballpark to retire.
Once you have a base idea, financial planning software will allow you to change assumptions and do a more advanced calculation.
Assumptions such as adding a long-term care stay, loss of a job or a death of a spouse early on in retirement. Running projections with various scenarios such as those will help fine tune your road to success and give you an idea of what you’re up against.
Knowing how much you need to have saved for retirement is an important number that many people never bother to calculate.
This is a huge mistake.
If you don’t know where you’re trying to go, how can you get there?
It’s time to get the answer.