This week, the theme is how much money do you need to retire?

Each day this week, I’m breaking down this really big and important question into bit-sized pieces to help you better understand what it will take to retire with confidence, why the answer to this question is different for everyone, and how you can answer for yourself: How Much Money Do I Need To Retire?

Today, I’m sharing with you my super-secret back of the envelope way to figure it out how much you need to retire. Now I have to warn you that this quick and dirty calculation has its limits because it doesn’t factor in your longevity and possible scenarios like higher inflation, how your portfolio is invested, etc. but it’s a great place to start.

So here it goes...time to get out your envelope: 

First - Add up all of your planned expenses in retirement. Be sure to include health care costs, and all of your regular, ongoing monthly expenses. This is your basic monthly living expense. 

Next - Add in irregular and non-recurring expenses like travel one-time insurance. Build in a buffer for fixing the roof and buying a new car every few years. 

Then - translate all of your expenses into an expected spending figure for year 1 of retirement. You’re going to take all of your ongoing basic monthly expenses, multiply that by 12 months and lump in your irregular expenses together to calculate an annual living budget. If you need help with this and to make sure you capture everything, you can email me at [email protected], and I’ll be happy to send you the retirement budget worksheet that we use with our clients. 

Once you have your total living expenses for year one in retirement, add up all of your income sources. This could be social security, a rental property, a pension - whatever those are, add them up. 

Then calculate your gap. Your gap is the difference between your year 1 living expenses and your year 1 income sources. The gap will be filled with the income from your retirement portfolio. 

Lastly, take your gap number and divide that by your  total portfolio value. You’ll get a % amount. If this number is higher than 4-5%, you don’t yet have enough to retire. If it’s in the 4-5% range, then you can be more confident in transitioning into retirement.

Again, this simple calculation is no replacement for a detailed retirement analysis that considers all the important factors that I mentioned earlier, but if you’re currently in the camp of “I have no idea how much money I need to retire” this back of the envelope method will give you some answers. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip.

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