How Much Do I Need to Retire? 3 Numbers You Need to Know Before Retiring - Root Financial

To retire comfortably, you need to focus on three essential numbers. Surprisingly, these numbers have nothing to do with your current age or salary. Let’s dive in and explore what these numbers are and how you can use them to plan for a secure and enjoyable retirement.

The Three Essential Numbers

  1. Your Expenses in Retirement
  2. Your Fixed Income Sources in Retirement
  3. Your Portfolio Value at Retirement

These numbers form the foundation of any robust retirement plan. Understanding and accurately determining each of them is crucial to assessing your readiness for retirement.

Case Study: Becky’s Retirement Plan

To illustrate how these numbers come together, let’s look at a case study. Becky is 67 years old and wants to retire. She dreams of spending her time gardening, playing pickleball, and being with friends and family. However, working 40 hours a week makes it hard for her to find the time. Here’s how we help Becky understand her retirement possibilities.

Becky’s Investments:

  • 401(k) Plan: $275,000
  • Rollover IRA: $387,000
  • Standard Investment Account: $69,000

Becky is currently renting and plans to continue renting in retirement. She initially saved the $69,000 for a home down payment but decided to use it for retirement expenses instead.

We assume a 6.5% growth rate on Becky’s investments based on her comfort level and current asset allocation. While this rate isn’t guaranteed, it provides a reasonable basis for planning.

Determining Becky’s Expenses:

Becky’s projected monthly expenses in retirement are $5,000, after taxes and adjusted for inflation. This includes rent, utilities, healthcare, and other living costs. It’s essential to calculate these expenses accurately to ensure a realistic retirement budget.

Becky’s Fixed Income Sources:

Fixed income sources are regular income streams excluding portfolio withdrawals. For Becky, this primarily includes Social Security, which will provide $2,700 per month. It’s crucial to distinguish between fixed income and portfolio-based income since the latter can fluctuate based on market conditions.

Becky’s Portfolio Value:

The current value of Becky’s portfolio is important, but what truly matters is understanding how much her portfolio needs to be to cover the shortfall between her expenses and fixed income.

Calculating the Required Portfolio Value

Here’s how we determine the necessary portfolio value for Becky:

  • Yearly Expenses: $5,000 per month equates to $60,000 annually (after taxes and adjusted for inflation).
  • Fixed Income: $2,700 per month from Social Security totals $32,400 annually.
  • Annual Shortfall: $60,000 (expenses) – $32,400 (fixed income) = $27,600

Becky’s portfolio needs to generate $27,600 each year to cover the shortfall. Initially, this requires a withdrawal rate that Becky must sustain over her retirement period. In her case, she would need to withdraw approximately 6% of her portfolio annually, which increases the risk of depleting her savings too quickly.

Adjusting the Plan for Success

Given Becky’s initial withdrawal rate, she risks running out of money. Therefore, adjustments are necessary. Here are potential strategies:

1. Working Longer: By working one more year, Becky’s Social Security benefits increase due to delayed retirement credits, and her portfolio grows with additional contributions and investment returns. This strategy can significantly improve her retirement outlook.

2. Reducing Expenses: If Becky reduces her monthly expenses from $5,000 to $4,500, she decreases the amount her portfolio needs to cover. This reduction, combined with working one additional year, can enhance her financial security.

3. Combining Strategies: Combining working longer with reducing expenses provides a balanced approach. Becky can maintain her current standard of living while increasing the sustainability of her retirement savings.

Exploring Additional Options

Retirement planning is not one-size-fits-all. It involves exploring various options and trade-offs:

  • Downsizing or Relocating: Moving to a less expensive area or a smaller home can reduce expenses.
  • Adjusting Portfolio Allocation: Rebalancing investments to align with risk tolerance and retirement goals can optimize growth and income.
  • Supplementary Income: Part-time work or hobbies that generate income can supplement retirement savings.

The key is flexibility and understanding that minor adjustments can significantly impact long-term success. Becky’s journey highlights the importance of these three numbers and demonstrates that informed decisions can lead to a fulfilling retirement.

Retirement planning revolves around knowing your expenses, fixed income, and portfolio value. By focusing on these three numbers, you can create a tailored plan that meets your unique needs and aspirations. For individuals like Becky, this approach provides clarity and confidence in achieving a comfortable and secure retirement.

By understanding and manipulating these key variables, you can explore different scenarios and choose the path that best aligns with your retirement goals. With careful planning and thoughtful adjustments, you can turn your retirement dreams into reality.