How Much Do I Need to Retire? 5 Numbers to Help You Decide

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“Remember to overestimate your expenses and build in a margin for unexpected costs and consider the impact of taxes in retirement.”

Without the right strategy, planning for retirement can be overwhelming. In this episode, you'll take the first step towards creating a personalized retirement plan simply by taking stock of five essential numbers.

“Fixed expenses” means different things to different people. Learn how to zero in on what exactly those expenses are for you. You’ll also find out how much money really goes into an emergency savings fund, and how to factor in fixed income sources like social security and (for those lucky enough to have them) pensions.

Next, our host Danny Gudorf speaks on identifying the income gap between fixed expenses and your monthly income. You'll discover strategies for filling this gap, including the optimization of investment withdrawals using the 4% rule, as well as the art of sticking to your retirement income guardrails. Finally, Danny covers what you need to know about creating a tax plan for retirement.

Key Topics:

  • Fixed Expenses (2:44)
  • Emergency Savings Fund (5:29)
  • Fixed Income Sources (7:25)
  • The Gap Between Your Fixed Expenses and Monthly Income (10:36)
  • Investable Assets and How Much Income You Can Generate From Them (11:30)
  • 4% Rule Versus Retirement Income Guardrails (14:48)
  • Summarizing the 5 numbers (16:12)

Retirement is a significant milestone in life, one that many of us look forward to with anticipation and, sometimes, a bit of trepidation. Whether you're on the cusp of retirement or it's still a few years away, understanding the financial aspects of this new chapter is crucial. In this blog post, we'll explore the five essential numbers you need to calculate to determine if you're ready to retire. By the end, you'll have a clearer picture of your retirement readiness and the confidence to make informed decisions about your future.

Key Takeaways

Before we dive into the details, here are the core insights you'll gain from this post:

  1. Understand your expected retirement expenses
  2. Build a robust emergency fund for unexpected costs
  3. Calculate your fixed income sources in retirement
  4. Determine the gap between your income and expenses
  5. Assess your investable assets and sustainable withdrawal rates

These five numbers form the foundation of a personalized retirement plan. By calculating them, you'll be better equipped to answer the all-important question: "Can I afford to retire?"

The 5 Essential Numbers for Retirement Planning

1. Your Retirement Expenses

The cornerstone of any retirement plan is a clear understanding of your expected expenses. While a common rule of thumb suggests that retirees need about 75-80% of their pre-retirement income, this is just a starting point. Your actual needs may be higher or lower depending on your lifestyle and goals.

To calculate your retirement expenses:

  • List all your current expenses
  • Consider which expenses might change in retirement (e.g., commuting costs may decrease, while healthcare costs may increase)
  • Factor in new expenses related to retirement activities (travel, hobbies, etc.)
  • Don't forget to account for inflation

Pro Tip: Use a retirement budget worksheet to ensure you're not overlooking any expenses. Many financial advisors offer these tools for free on their websites.

Example:

Let's say John and Mary currently spend $6,000 per month. After reviewing their retirement goals and expected lifestyle changes, they estimate their retirement expenses to be about $5,000 per month or $60,000 annually.

2. Your Emergency Fund

An often-overlooked aspect of retirement planning is the emergency fund. In retirement, having a robust safety net is even more critical as you no longer have a steady paycheck to fall back on.

Recommended Emergency Fund: 12 months of living expenses

Why so much? In retirement, you want to avoid dipping into your investment accounts during market downturns. A substantial emergency fund allows you to weather financial storms without compromising your long-term plans.

Calculating Your Emergency Fund:

  • Take your monthly expenses (from step 1)
  • Multiply by 12

Example: If John and Mary's monthly expenses in retirement are $5,000, their ideal emergency fund would be $60,000 ($5,000 x 12).

Where to Keep Your Emergency Fund: Consider high-yield savings accounts or short-term, low-risk investments like Treasury bills. The goal is to balance accessibility with a modest return to help offset inflation.

3. Your Fixed Income Sources

Fixed income sources form the bedrock of your retirement income strategy. These are the reliable, steady streams of income you can count on month after month. The most common sources are:

  • Social Security benefits
  • Pension payments (if applicable)
  • Annuity payments (if you've purchased an annuity)

How to Calculate Your Fixed Income:

  1. Social Security: Visit the Social Security Administration's website (ssa.gov) and use their benefits calculator. You'll need to create an account to get personalized estimates based on your earning history.

  2. Pension: Contact your pension plan administrator for an estimate of your monthly benefit. Be sure to understand your options for single-life vs. joint-and-survivor benefits if you're married.

  3. Annuities: If you have an annuity, review your contract or contact your provider for details on your guaranteed income stream.

Example: Let's say John and Mary's fixed income sources break down as follows:

  • Social Security (combined): $3,000/month
  • John's pension: $1,000/month
  • Total Fixed Income: $4,000/month or $48,000/year

Pro Tip: Consider delaying Social Security benefits if possible. For each year you delay beyond full retirement age (up to age 70), your benefit increases by about 8%.

4. The Income Gap

Now that you know your expenses and your fixed income, it's time to calculate the gap between the two. This gap represents the amount you'll need to generate from your savings and investments each year.

To calculate your income gap:

  1. Take your annual expenses (from step 1)
  2. Subtract your annual fixed income (from step 3)

Example: John and Mary's calculations:

  • Annual expenses: $60,000
  • Annual fixed income: $48,000
  • Income gap: $12,000 per year

This $12,000 gap is what John and Mary need to generate from their retirement savings each year to maintain their desired lifestyle.

Understanding the Importance of the Income Gap: The size of your income gap directly impacts how much you need to have saved for retirement. A smaller gap means less pressure on your investment portfolio, while a larger gap requires a more substantial nest egg or potentially adjusting your retirement expectations.

5. Your Investable Assets and Withdrawal Strategy

The final piece of the retirement readiness puzzle is understanding your investable assets and determining a sustainable withdrawal strategy.

Investable Assets:

These are the funds you've accumulated in various retirement accounts such as:

  • 401(k)s
  • Traditional and Roth IRAs
  • Taxable investment accounts

Add up the balances of all these accounts to get your total investable assets.

Withdrawal Strategy:

Once you know your total investable assets, you need to determine how much you can safely withdraw each year. This is where things get a bit more complex, and strategies can vary based on individual circumstances.

The 4% Rule: A common starting point is the "4% rule," which suggests that you can withdraw 4% of your portfolio in your first year of retirement, then adjust that amount for inflation each subsequent year. However, this rule has limitations and may not be suitable for everyone.

Retirement Income Guardrails: A more nuanced approach is using "retirement income guardrails." This strategy allows for higher initial withdrawal rates (potentially up to 5.4% or more) but includes rules for adjusting withdrawals based on portfolio performance.

Example: Let's return to John and Mary. They have $500,000 in investable assets.

  • Using the 4% rule, they could withdraw $20,000 in the first year ($500,000 x 4%)
  • Using a 5.4% withdrawal rate with guardrails, they could potentially withdraw $27,000 in the first year ($500,000 x 5.4%)

In this case, the guardrails approach would cover their $12,000 income gap with room to spare, while the 4% rule would fall short.

Important Considerations:

  • Your optimal withdrawal rate depends on factors like asset allocation, retirement length, and risk tolerance.
  • Regular review and adjustment of your withdrawal strategy is crucial throughout retirement.
  • Consider working with a financial advisor to develop a personalized withdrawal strategy that aligns with your specific situation and goals.

Putting It All Together: Can You Afford to Retire?

Now that you've calculated these five essential numbers, you're in a much better position to answer the question, "Can I afford to retire?" Here's how to interpret your results:

  1. If your fixed income plus sustainable portfolio withdrawals cover your expected expenses (including a buffer for unexpected costs), you're likely in a good position to retire.

  2. If there's a significant shortfall, you may need to consider:

    • Delaying retirement to save more or increase Social Security benefits
    • Reducing your expected retirement expenses
    • Exploring part-time work in retirement to supplement your income
    • Reassessing your investment strategy to potentially increase returns (keeping in mind the associated risks)

Remember, retirement planning is not a one-time event. It's an ongoing process that requires regular review and adjustment as your circumstances change.

Additional Considerations for a Successful Retirement

While the five numbers we've discussed form the core of your retirement plan, there are other important factors to consider:

Tax Planning in Retirement

Understanding how taxes will impact your retirement income is crucial. Different income sources are taxed differently:

  • Social Security benefits may be partially taxable
  • Traditional IRA and 401(k) withdrawals are typically fully taxable
  • Roth IRA withdrawals are generally tax-free

Strategic withdrawals from various accounts can help minimize your tax burden in retirement.

Healthcare Costs

Healthcare is often one of the largest expenses in retirement. Be sure to factor in:

  • Medicare premiums and out-of-pocket costs
  • Long-term care insurance or potential long-term care expenses
  • Health Savings Account (HSA) contributions if you're still working

Inflation

While we touched on inflation earlier, it's worth emphasizing its impact on your long-term retirement plan. Ensure your investment strategy and withdrawal rate can keep pace with rising costs over time.

Estate Planning

Consider how you want to pass on your assets to heirs or charities. Proper estate planning can help minimize taxes and ensure your wishes are carried out.

Conclusion: Your Path to a Confident Retirement

Calculating these five essential numbers – expenses, emergency fund, fixed income, income gap, and investable assets with a withdrawal strategy – provides a solid foundation for your retirement planning. By understanding these figures, you're taking a crucial step towards a confident and secure retirement.

Remember, retirement planning is complex, and everyone's situation is unique. While these calculations give you a good starting point, consider working with a financial advisor who can provide personalized guidance and help you navigate the nuances of retirement planning.

Your dream retirement is within reach. By taking the time to understand your financial picture and make informed decisions, you can look forward to this next chapter of life with excitement and peace of mind.

Ready to take the next step? Consider scheduling a retirement assessment with a financial professional who can help you refine your plan and ensure you're on track for the retirement you've always envisioned.

Schedule your free retirement assessment today and take control of your financial future!

*This blog post is based on the insights shared by Gudorf Financial Group. For personalized advice tailored to your unique circumstances, always consult a financial, legal, or tax professional.*

Transcript: Prefer to Read — Click to Open

Danny (00:05.454)

Welcome to the Limitless Retirement Podcast. My name is Danny Goodorf, the owner of Goodorf Financial Group. Whether retirement is on your horizon or you’ve already made the leap, this podcast tackles your most important questions in retirement. Every episode, I’m here to share valuable tips and strategies to help you succeed in retirement. So let’s go ahead and get started with today’s show.

Have you thought to yourself, I cannot work another day? A few years ago, a client called me and those were literally the first words out of his mouth. He was almost shouting at me, saying, I’ve had enough. How much money do I need to retire? The truth is most people don’t have any idea how much retirement will actually cost them. They’ve done some Googling around the internet.

and find some really generic numbers. But in each case, it’s so different that the generic numbers will only get you so far. Many people can retire way earlier than they thought they could, but a few others, they actually have to wait longer than they expected. Today, I’m gonna give you a simple system to help you determine whether you might be able to retire

and all you need to do is calculate five numbers. That will begin to help you create a personalized retirement plan. Imagine retiring sooner than you thought was possible. For a few of you, it may be the other way around. But let’s focus on the hopeful dream of retiring with confidence before you thought you were able to. Are you ready to discover what those five numbers are? Figuring this out

could mean the difference between spending your years relaxing and enjoying your grandkids and other family members. Doing all the things you’ve always hoped of doing. Now, I know creating a retirement plan sounds a bit daunting and difficult, but don’t worry. I’m gonna break it down into a step -by -step process. We’re not gonna be creating a full retirement plan today,

Danny (02:32.462)

but I want to give you the five numbers that will help you get much closer to determining whether you can afford to retire or not. So let’s jump right in. The first number you need to know, and this is not going to be a shock to anyone, is your expenses. For many people, your living costs in retirement are gonna be somewhere around 75 to 80 % of your pre -retirement expenses.

But that’s just a rule of thumb. You need to know exactly what your numbers are going to be. So the first thing you need to figure out is what are my expenses going to be? How much is my housing going to cost me? We have to think about insurance and property taxes and utilities. What about food? What about healthcare? Are my healthcare expenses going to go up or are they going to go down in retirement? For some people,

I think back to when they had really great healthcare plans at their employer and they haven’t had to pay anything out of pocket ever. Now in retirement, they may need to pay for Medicare Advantage or Medicare Supplements or Medicare Part D. So they’re gonna have some healthcare expenses that they’re not used to having. Your expenses could potentially go up a little bit, but you also want to try to overestimate

what your expenses are gonna be. You want to build in a little bit of a margin or a buffer into that plan. You also wanna make sure that you build in money to do the things you’ve always dreamed of in retirement. You have your base fixed expenses that you’re gonna have to spend no matter what. And then you have your variable fun expenses that you’re gonna be able to budget for as well. You want to be able to have money

to go visit your family, take trips, and do the things that you like to do. You want to build that into your budget. Having a unrealistic budget is only going to end up hurting you in the long run because just scraping by in retirement, while it’s nice, you don’t have to go into work anymore, it’s really not the ideal retirement. You want to create a budget not just for scraping by, but one

Danny (04:58.892)

that will allow you to live the retirement that you’ve always really wanted to live. Another way to calculate your retirement expenses is using our streamlined retirement budget. If you go down in the show notes, you can download our retire ready toolkit in the description. It will give you access to this fillable PDF that walks you through exactly what you need to do. So the first number you need to know

is what your expenses are gonna be. The second number you need to know to experience a great retirement, and this is a little bit less common figure, is how much you need in your emergency savings fund. Before you embark on your retirement, you need a nest egg of at least around 12 months of living expenses tucked away for the unexpected. This is your insurance policy

so you don’t have a surprise bill that ends up throwing your retirement plan out of whack. Maybe your water heater goes out, or your boiler, or the air conditioning breaks down, or there’s large car repairs that are needed. Whatever those expenses are, you don’t wanna have to pull from your current retirement accounts or your monthly income, or have to take a distribution earlier to pay for those. That is gonna mess up

your most important time in retirement, which is gonna be those first five to seven years. You want to know exactly where your expenses are coming from and how you can pay the bill. So if your monthly expenses are $5 ,000 a month, you’re gonna want somewhere around $60 ,000 in a savings account. And you wanna put this into a high yield savings account or treasury bond someplace

that is very safe and is not going to fluctuate. You don’t want to have to pull it out at a loss if the market is moving. And I wouldn’t even put this reserve fund and a long -term bond fund. I would keep it very safe in a savings or CD -like account. So first, know what your expenses are. Second, you want to know what that emergency savings fund number is. That’s the second number.

Danny (07:23.938)

All right, let’s jump into the third number that you need to know. And this is going to be your fixed income sources. This could be things like social security, pension income, or any income that you can guarantee will be coming in. For most retirees, guaranteed income is going to be from your social security income. This is going to form the base of your retirement plan. This is what everything else

is going to be based upon. You want to find out exactly how much you can expect from your pension and from your Social Security income. Because, let’s face it, no one has a pension anymore. So it’s important that we get this Social Security number correct. Whatever your fixed income sources are, those guaranteed sources of income are going to be the things that you can count on. Now,

When it comes to Social Security, you can go to the Social Security Administration website, and I’ll post that link in the show notes. You can pull up your exact benefit amount. So you’re not guessing on what it will be, but you’ll have a very clear idea of how much money you can expect will be coming in. If you do have a pension, you’re one of the lucky people to have one. You might want to reach out to your plan administrator,

and try to get an idea of how much you can plan on and what your spousal benefit options are. That is a big factor when it comes to deciding on your pension. If you have an annuity, same thing. You want to know what your fixed income is. That is the most important number that you need to know before we can decide if you’re able to retire or not. How much

of your income is going to be fixed? How much of your income is going to be guaranteed? That is what we need to know what that ratio is, because that’s what’s going to determine what your portfolio needs to cover. So let’s take a look at an example. Now that we know what our expenses are, in this case, we’re going to say the expenses are $5 ,000 a month. Next,

Danny (09:49.966)

we need to calculate what our reserve savings needs to be. If we have $5 ,000 of monthly expenses times 12, we’re gonna need roughly $60 ,000 in emergency savings. The third number we need to know is how much is my fixed income? And what is that guaranteed income number going to be? So, in this example, we’re gonna say that our fixed income

is $3 ,000 a month. So you have $3 ,000 a month coming in. Now we know what that fixed expenses are going to be and we know what our fixed income is. We can begin to work around on the final two numbers. The next number, the fourth number you need to know is what is the gap, the shortfall between your fixed expenses and your monthly income. So in this situation, our monthly expenses

are $5 ,000 and your guaranteed income is $3 ,000. That means you have a gap of $2 ,000 a month that you need to fill. If you were to retire today and that was the only income you had coming in, then you’re gonna run out of money and be in a hole pretty quickly. So what you want to do is subtract your estimated Social Security, pension,

and any annuity payments from your expenses to see your shortfall. But once you’ve done that, the question is, how do you fill the gap? The fifth number you need to know, and I’m going to cheat just a little bit because it’s actually two numbers, is what your investable assets and how much of those investable assets can you generate in reliable retirement income?

So let’s break it down a little bit. Let’s say you have $100 ,000 in a Roth IRA, you have $100 ,000 in your traditional IRA, and you have $300 ,000 in your 401k account. So in total, we have $500 ,000 of investable assets. We’re not going to include your emergency savings or your cash that you’re holding onto for short -term expenses. But…

Danny (12:13.646)

for long -term living expenses, have $500 ,000 of investable assets. The question is, how much income can I reasonably expect to withdraw from these accounts? One rule of thumb that we’ve talked about in the past that a lot of retirees use is the 4 % rule. And that shows us that we can take out 4 % out of your investment account and adjust it for inflation each year. In our office,

we use something called retirement income guardrails. So in this scenario we just laid out, you know you’ve got a half a million dollars of assets. You’ve got a 2 ,000 a month shortfall. You need about $24 ,000 in income. And taking out 4 % of your portfolio a year simply isn’t gonna provide the gap.

You need 24 ,000, but your portfolio can only generate 20 ,000. Now you have to begin to do some of the hard work of saying, is there a way to optimize my plan to make up for that $4 ,000 difference? What if I took my social security a bit later? Does that help close the gap? Is there any place in my budget where I could cut or

Is there a way to increase the amount of withdrawal from my investment accounts? Now, you know that I’m not a big fan of the 4 % rule. It was essentially created 30 years ago when a financial advisor ran a sequence of return risk to see how much you could pull out before your account value ran to zero. In all of these different environments, good markets, bad markets, he took an account

that was 50 % stocks and 50 % bonds. And he found that you could pull 4 % a year out without it ever running out of money. Now, the problem is it’s not an overly optimized portfolio and is way too conservative. If you had a better optimized portfolio, you could typically pull out at least 5 .4 % and possibly even more utilizing

Danny (14:40.59)

what we call our retirement income guardrails. So if we compare our two retirement income spending strategies, we have our 4 % rule, which is gonna give us about $20 ,000 of annual income. And then we have our retirement income guardrails number, which would give us about $27 ,000 of income. So if we look at the examples, we needed 24 ,000 and our income guardrails number

is going to give us the $27 ,000 that we need to be able to fill that gap. So your retirement spending strategy and how you determine how much money you can take out of your portfolio is a very important one because we have to be able to cover that gap. If we cannot cover our spending gap, then we have to save more or we have to work longer. But that’s why this is so important because it gives us clarity on where we’re at

when it comes to our retirement savings. One other variable that we didn’t really talk about is taxes and retirement. And taxes is gonna be very important and it’s gonna be one of your largest expenses in retirement. So I have a video here that will walk through the taxes and retirement and that should help you when you’re putting together your tax plan. And I’ll put that video in the show notes. In summary, the five numbers

you need to calculate to determine if you can retire today are number one, you have to figure out what your expenses and retirement are going to be. Two, you have to see if your emergency fund is built up enough. We want about 12 months of living expenses in your emergency fund. Number three is your fixed income sources. Those are going to be social security, pension or annuity. How much of

those fixed income sources do we have. Four is going to be the gap between your fixed income sources and what your expenses are going to be. And then number five, your investable assets and how you go about taking income from those investable assets. By calculating these five numbers, you can begin to create a personalized retirement plan and determine if you can afford to retire or not.

Danny (17:06.763)

Remember to overestimate your expenses and build in a margin for unexpected costs and consider the impact of taxes in retirement. If you have any questions or need help calculating your retirement plan, feel free to reach out using the link provided in the show notes. We offer a free retirement assessment for anyone who’s looking to get started with their retirement plan.

With careful planning and a clear understanding of your financial situation, you can work towards the retirement you’ve always dreamed of, knowing that you have the confidence and the clarity to spend what you want in retirement. Thank you for listening to another episode of the Limitless Retirement Podcast. If you want to see how Goodor Financial Group can help you get the most out of your money, go to GoodorFinancial

This is where you can schedule a 20 -minute call to see how our firm can help prepare a free retirement assessment. Please remember, nothing we discuss on this podcast is intended to serve as advice. You should always consult a financial, legal, or tax professional that is familiar with your unique circumstances before making any financial decisions.

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