The theme this week on the Retirement Quick Tips Podcast is: How Much Is Enough?

Yesterday I talked about a Fidelity study that gives you some benchmarks on figuring out for yourself how much is enough for retirement. 

Today, I’m talking about a back of the envelope calculation that you can run to help you determine how much is enough. I wouldn’t rely on this to make important irreversible decisions about retirement. More careful planning is required, but this will at least get you started. 

I’m just going to run through this pretty quickly in today’s episode, but if you want to go more in depth in running this calculation, I’ve linked to an article in Kiplinger than will help you do that in today’s show notes, which is episode 1448.

Link to article: https://www.kiplinger.com/retirement/605117/find-out-in-5-minutes-if-you-have-enough-to-retire 

The first step is you’ll need to figure out your monthly expenses. If you don’t know or don’t track what you spend on a monthly basis on the basics like gas, groceries, utilities, your Netflix subscription, eating out, clothes, etc. You’ll want to track that for at least 3 months to start to get an average. 

There are expenses that will go away or change in retirement, and some that will go up. If you’re like me, you probably would stop getting your nails done every 3 weeks at $40 a pop, but I’m definitely still getting my hair done and I’d probably spend more on travel once I’m retired. 

So track those expenses and come up with a figure. You’ll need to add taxes too, so in most cases you’ll want to tack on another 20-25% a month for taxes.  

A trick offered in the Kiplinger article is to “Look at two years of annual statements from your bank accounts. Divide the total debits by 24. That’s it. This is an accurate portrayal of your monthly expenses. This should encompass everything except what you pay for before it hits your bank account (taxes, health insurance premiums, group life insurance, etc.).”

Ok, now that we know your spending in retirement, we need to look at sources of income from social security, pensions, rental income, and other income streams that will be flowing in during retirement. Don’t count your portfolio withdrawals here, that will come next.

Once you know your outflows (expenses) and your inflows (income), then you can calculate the gap that will need to be filled with your portfolio withdrawals. 

Let’s say your expected expenses in retirement including taxes are $6,000 a month. Your income from social security and other sources will be $3,700 a month, which leave $2,300 a month that needs to be covered by portfolio withdrawals.

Multiply this by 12 and you have $27,600 that you’ll need to take out of your investments in your first year of retirement.

From there you can use the 4% rule to calculate if this is sustainable. Again this is not perfect, but it provides a good starting place and a good estimate. 

$27,600 of annual income is 4% of a $690,000 portfolio. So in this case, if you have around $700,000 or more in assets, you probably have enough to retire. 

As a back of the envelope calculation, it gets the job done and helps you determine if you’re on track and have enough to make work optional or just simply retire. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.  

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance