In this week’s episode we discuss:

  • How do you know how much is enough,
  • Why it’s so important to know your number
  • What you should and shouldn’t focus on
  • Three types of people will be discussed the not quite yet, just right, and overflow.

Show Notes:

What you should not focus on:

  • % of salary rule.  Whether thats 70% or 80%, 90% or some other number. I.e. 12x salary
  • 1 million dollar rule or multimillionaire 
  • Waiting until you take social security

Instead focus on:

  • Your personal situation.  Not society, family, friends, co-workers, etc.
  • Current expenses – i.e. current lifestyle cost.  Different stages in life our spending looks different. (i.e. early working career, family, post-family, part-time work, no work, travel more)
  • Future expected expenses – i.e. desired lifestyle while factoring in taxes, healthcare, inflation, possible more active lifestyle in earlier years of retirement and decline as get older
  • 4% of portfolio plus other fixed income of SS, pension, etc cover your expenses?  Is there a cushion? How much of a cushion?

Determining how much is enough:

  • Step 1: identify current expenses
  • Step 2: from current expenses identify future expenses.  Which ones will stay same, what will increase and/or decrease, what additional expenses, if any can be subtracted.
  • Step 3: continually look and evaluate your current and future expenses and determine do I have enough?  Am I on track with my desired date?  Do I need to save more now or live more now?

How Much Do I Need to Retire?

  • The 4% sustainable withdrawal rate.2
  • Essentially, this is the amount you can theoretically withdraw through thick and thin and still expect your portfolio to last at least 30 years. Not every expert today agrees that a 4% withdrawal rate is optimal, but most would argue you should try not to exceed it.
  • If you stick to the 4% rule, here’s how much you could withdraw annually from three different nest eggs:
    • $500,000—$20,000 a year
    • $1 million—$40,000 a year
    • $2 million—$80,000 a year
  • To figure out how much income you’ll need in retirement, take your estimated monthly expenses (be sure it’s realistic) and divide by 4%. So, for example, if you estimate you’ll need $50,000 a year to live comfortably, you’ll need $1.25 million ($50,000 ÷ 0.04) going into retirement.
  • So, after you add it all up, if your total retirement income exceeds your predicted expenses, you probably have “enough” for retirement.

Three types of people – not quite yet, just right, and overflow

  • Not quite yet
    • When ask most people about their future goals, expenses, wants, etc.  Most people don’t know what they want but they do know what they don’t want and that is any less of a lifestyle than they have now.  Can you relate?
        1. If you find yourself short of where you would like to be May need to work full-time longer, go part-time before retiring completely, lower your cost/standards of living i.e. your lifestyle, downsize house as that may have a big chunk of equity you could utilize, put more money towards investing, increase income
        2. Don’t count on winning lottery, inheritance, or selling of business.  Those things aren’t guaranteed and you don’t want to be dependent on outside things that are out of your control.  That isn’t financial independence. 
  • Just right
        1. This person or couple may take more risk than they need to if they already have enough.  They have identified current and future expenses
        2. They May work longer than they need to, thus potentially not living the life they desire to (i.e. traveling, grandkids, relaxing, and on and on
        3. They may Spend money and feel guilty because they don’t realize they have enough money
        4. They may Cut back and don’t live life to the fullest
        5. They simply Don’t understand they can enjoy their money
  • Overflow
      1. This person or couple is in one respect in the worst position 
      2. You may ask why?  They have plenty
      3. Yeah how long have they had plenty?
      4. How have they been spending their time?
      5. Has it been doing what they want, what they desire, have they been living life to the fullest or begrudgingly going to work day in and day out.

It’s common for retirees’ expenses to go through three distinct phases:

  1. Higher spending early on
  2. Modest spending for a long period after that
  3. Higher spending near the end of life, due to medical or long-term care expenses

The sooner you do the math, the more time you’ll have to make the numbers work in your favor.

Planning is a lifelong process.

Call to Action: 

  • Identify what category are you in? Not quite, just right, or overflow.  Are you on the right track?