Of all the questions I’m asked as a financial planner, the top two are usually some variation of:
1 – When can I retire?
2 – Will I have enough money to retire?

Usually, these questions are being asked by those whose retirement date should be just around the corner. I’m always excited, though, when those whose retirement date is further out ask the same questions because they have that much more time to make their dreams become a reality. Breaking down the answer to these questions is a large part of what any good financial advisor should help you do. Often, the answer to one is dependent on the answer to the other, so let’s address them both as one.

How do you begin to outline your retirement finances?
First, tally up your known income sources and make note of when they start. Retirees’ known income sources may include pensions, social security, annuity payments, and real estate rental income. If you’re under the age of 50, I often advise running these numbers with a partial social security figure to account for potential legislative changes to benefits down the road. If you’re 50 or older, chances are the politicians will want to keep your vote and thus will keep your benefits right where they are. This is simply a rule of thumb, so plan accordingly.

Second, add up your expected monthly living expenses in retirement.

Be sure to include monthly figures for healthcare and income taxes. If any of these expenses are likely to be different when you’re retired than they are now (for example, mortgage will be paid off, you’ll be on Medicare, income tax bracket may be lower, or you plan on traveling more) be sure to account for that.

Next, get a preliminary budget shortfall or surplus starting point by subtracting these expenses from your known income sources. Do you have a surplus? If you do then you’re at a good starting point. If you don’t, you’re not alone. On to the next step: Take your budget shortfall, annualize it, and multiply it by the number of years you plan to be retired. For many, this is around 30 years. This is the money you’ll have to find from somewhere over the course of your retirement. That’s where your savings, workplace retirement plan, and IRAs come into play. It’s also where downsizing your home can make a huge difference in your plan. Assuming no growth (an overly conservative assumption) do your combined savings and retirement investments cover this number? If so, you are now at a great starting point. If not, you still have some planning ahead of you.

This planning might include:
• Adding to retirement investments
• Asset allocation of retirement investments
• Evaluation of living expenses in retirement
• Evaluation of income from asset sales, possibly including land, collectibles, or even cash-value life insurance (only when necessary
for your specific situation)
• Consideration of working longer or part-time employment in retirement

This simple process will give you a good start towards evaluating your retirement finances and determining just what kind of adjustments might make sense for you. There are, of course, any number of variables that can positively or negatively affect your specific retirement outlook. They include investment growth, inflation, your health, future legislative changes to the tax code or social security benefits, and many others. Factoring in all of the most likely assumptions and getting more specific is an exercise that you, your spouse, and your financial planner should work through together.

When should you do this? There’s no time like the present.

Disclaimer: This article is generalized in nature and should not be considered personalized financial, legal, or tax advice. All information and ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.


by John N. Hall, CFP®