How Do you Know if You Have Enough To Retire?

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Most have no idea what it takes

I was talking with a friend of my wife’s the other day and she said that her planner said that she needed to work for 3 more years and then she could retire. Since she doesn’t particularly like her current job, I asked if she would like to retire now, and she said she didn’t have a big enough nest egg. I asked her how much income she needed and she didn’t know.

This is very common. A few years ago, a brokerage company ran a series of commercials that asked, “What is your number?”  There were a bunch of people walking around with big numbers tucked under their arms. Most of the numbers were in the millions. The problem with this focus is that it ignores the most important element to providing retirement security; INCOME!

We spend our entire working lives being told to save, invest and build your nest egg. So we buy stocks, real estate, bonds and other investments without regard to what we will do with that money when we need to live off it. After all, there are only two ways to create income; you at work or money at work. The problem comes when you are ready to make the transition, your money may not be ready to help. Just today, I was speaking with a tax preparer in my building and he told me about a client he has who is struggling to pay his bills, yet his net worth is over $4million dollars!! That is what I call asset rich and income poor. In many ways it is worse than being poor. After all, you have the liabilities and costs of having wealth, without enjoying the benefits! I wrote about this phenomenon last November, you can read it here. That post included a link to a research paper on the subject.

Figuring out what it takes to retire comfortably

As in most things you want to plan successfully, you must first know what you are trying to accomplish. The question that must be answered is “How much income do I need to retire”? This should not be a guess or a “ballpark” figure. I hear “rules of thumb” being used like 80% of your pre-retirement income, or some other easy shortcut. The problem is, for some that will be too much and for others, not enough. Since this is your retirement, if you want it to fit, you have to try it on.

When I work on this issue with clients, we start by having them understand Parkinson’s Law. When I was introduced to this law of money, it was presented as: “Expenses have a tendency to rise to meet or exceed income”. This is the reason most people fail to create financial security for themselves.

We then have them complete a “Cash Flow Analysis” worksheet. This exercise helps you to know exactly how much you spend and what are you spending it on. We need to do this since I believe “money spends itself” is how most people end up budgeting and tracking their expenses. Once you know what your life costs each month, the client looks over the list to see if they are spending more on providing elements of their life than they realized. We have no feeling about what a client spends on in their life. We do look for ways to deliver their lifestyle for less money. For example, sometimes we find ways to reduce insurance costs by rearranging or consolidating coverage, sometimes it takes restructuring mortgages and debts to be more efficient. We never know in advance where we can find the money.

OK, but what about retirement? 

Once that step is done, we can then look at what expenses will go away. Maybe subscriptions, dry cleaning or work clothes will no longer be needed. There are probably other expenses that will go away. Then we need to add back expenses that you didn’t have previously or things you want to spend more on. Will you now have to pay for health insurance? Do you want to travel more? If so, to where? What do you want to spend? This can be a fun and enlightening process. After all, you are designing the remainder of your life! Either way, once the picture is clear, the decisions about investments, retirement date, preparations, etc. become much clearer and easier to accomplish. It all starts with the Cash Flow Analysis exercise.

If you would like a complimentary copy of this tool, click here and we will get a copy to you right away. Here’s to you enjoying a great retirement!
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