Worried About Retirement? Take a Blank Page and Do This - Root Financial

Retirement planning can be intimidating. There are so many variables; retirement expenses, inflation, portfolio performance, Social Security. And many of these things would require a crystal ball to predict, something that none of us have. How can you plan properly for retirement when you have so many unknown variables? 

Retirement planning doesn’t have to be complicated, nor does it require a crystal ball! If you have ten minutes and a blank piece of paper, you can create a retirement plan even if you’ve not done any retirement planning at all. 

Grab your paper, and let’s get started!

Retirement Planning in 6 Simple Steps

It’s really that easy! Follow these 6 steps, and you’ll have a solid retirement plan in place. 

It’s really that easy! Follow these 6 steps, and you’ll have a solid retirement plan in place. 

Step 1: Understand Your Retirement Expenses

What your expenses will look like in retirement is different for everyone. We each have a unique lifestyle to maintain and goals for our retirement. We may want to travel, volunteer, spend time with family, or spend a lot of time on the golf course! 

Whatever you want your retirement to look like, we all have expenses that need to be paid in order to maintain our standard of living when we’re no longer bringing in a paycheck. One rule of thumb that can be used to estimate retirement expenses is the 80% Rule; you’ll need 80% of your pre-retirement annual income during retirement to maintain your pre-retirement standard of living. 

If our pre-retirement salary was $100,000, according to the 80% Rule, we’ll need $80,000 per year during retirement. 

$100,000 x 80% = $80,000

But not all of that $80,000 is going to come from our portfolios. This leads us to the next step. 

Step 2: Back Out Non-Portfolio Income Sources

We don’t have to rely solely on our investment portfolio for our retirement income. Other retirement income sources can include pensions, rental properties, and Social Security benefits. For our examples, let’s assume we will have $30,000 in non-portfolio income. That means we will need $50,000 from our portfolio.

$80,000 – $30,000 = $50,000

Step 3: Adjust for Inflation

Let’s assume retirement is ten years away. Our portfolio’s $50,000 today will buy fewer goods and services in ten years thanks to inflation. Let’s assume an inflation rate of 3%. To maintain the purchasing power of our $50,000, we actually need $67,000 from our portfolios. That’s the impact of ten years of inflation. 

$50,000 x 3% over ten years (cumulative inflation rate of 34.39%) = $67,196; we’ll round down to $67,000 for simplicity

Step 4: Adjust for Taxes

Our retirement number needs to be net, after taxes. Tax brackets change all the time, so again, your retirement tax bracket is an unknown. Let’s assume a 20% for our example. 

After paying taxes, our $67,000 needs to be closer to $84,000. 

$67,000 ÷ 80% (what you keep after taxes) = $84,000 

Step 5: Adjust for the Withdrawal Rate

Let’s assume we have a portfolio that can generate 5% a year. We have to divide your portfolio value by this withdrawal rate to see what we need our portfolio value to be to support our living standard on an ongoing basis, adjusted for inflation. 

Let’s assume a withdrawal rate of 5% on our $84,000. We need a portfolio value of $1.68 million, not today but in ten years when we want to retire. 

$84,000 ÷ 5% = $1.68 million

Step 6: Work Backward Using a Financial Calculator

How much do we need to save to reach our retirement portfolio number of $1.68 million? Well it depends on how much we already have in our portfolio today. For this example let’s assume you currently have $750,000 in your portfolio. 

Once we know that, we can use a financial calculator to plug in the numbers. The one I used is from Calculator.net.

  • Number of periods: 10 (this is the number of years until retirement)
  • Assumed growth rate: 7% (this is an assumption, but is certainly not guaranteed)
  • Present value: $750,000 (this is the current value of our portfolio)
  • Future value: $1.68 million (this is the amount of money we calculated we need to retire in 10 years)
  • PMT: $14,811.08 (this is how much we’ll need to save each year to be on track to hit our portfolio goal by retirement)

The payment (PMT on your calculator) is what we’re trying to solve for. In this case, it solves for how much we need to add to our portfolio on an annual basis. If we divide that number by 12 then we can see that we would need to save about $1,235/month to be on track for our retirement goal.

Pretty straightforward, right? This simple ten-minute exercise not only takes the complexity of retirement planning away but it also gives you a goal. And a goal is important in any type of plan. If you want to lose weight, you need to determine the number of pounds you want to lose so you can track your progress, make adjustments if you’re not on track, and know when you’ve reached your goal.

No Chance! 

These numbers might seem impossible to some. Again, retirement numbers are different for everyone. You may not need anywhere near $80,000 per year. The average American who retires at 65 will spend 20 years in retirement and spend $987,000 over those 20 years. That means spending $49,350 per year, well under the $80,000 we used in our example. 

There are so many variables; you may have more outside income, a bigger Social Security benefit, be in a lower tax bracket, or live in a state that doesn’t have an income tax. But you can still use the 6 Steps outlined above to formulate your retirement plan. 

If you’re curious about the least amount of money you can get by on during retirement, check out this video. Never miss an upload by subscribing to the channel and clicking the bell, so you get all of our notifications. 

I also do a weekly podcast, Ready for Retirement with James Conole, where we talk tips and strategies that will help you create a better retirement. 

And if you need additional help with your retirement plan or other financial planning needs, reach out to us here.