As a licensed financial professional, we help our clients meet their financial needs. One of these needs is having the correct and right amount of life insurance. Another need is helping them reduce debt. A third need is setting up basic savings plans and college savings plans. A fourth is having an estate plan. Perhaps the most important need is having enough for retirement. That’s what I will discuss here.
When we ask clients when they want to retire, we get three answers. Immediately, age 60 to 65, or we never really thought about it. Surprisingly, it’s not easy to determine when you can retire. It’s even harder to figure what to do after you retire and maintain your mental and physical health. I know it seems heartless to think about retirement when so many are suffering now, unable to buy food, about to get evicted, jobs and income lacking, a pandemic crushing all records. It’s a horrible situation. I can only have faith and hope that things will get better, vaccine distribution widespread, right action taken, and we can come together as a people. If I can remove one worry you have about the future, make you feel a bit better you have more control than you think, that’s worth it.
After much experimentation and effort spent thinking about the problem, you only need to track nine numbers over time to see when you can retire. Most financial professionals will ask you for dozens of pages of information. I consider that highly invasive, time consuming, and unnecessary.
- 1 – Investable Assets minus House Equity
The starting point, this value will tell you how much your assets can grow over time. I expect House Equity to grow with the growth in the economy. That’s why we exclude it.
- 2 – Monthly Investment Contribution Years 1 to 10
This tells us how much you can contribute for the next 10 years, every month.
- 3 – Monthly Investment Contribution Years 10 and above
For most of us, the amount we can contribute after 10 years will be higher than the first ten years. To simplify, you can capture the same amount for all years, which is common.
- 4 – Expected Growth Rate of Investments
This is how much you expect your investments to grow, year after year, on a compounded annual basis. This includes your starting investment and monthly investments.
- 5 – Inflation Rate
It’s no use earning money if you can’t keep up with inflation. We use 4% per year as a historical inflation rate over the last 20 years. You can lower that rate if you must, at the risk you will not have enough income to maintain your lifestyle in later years.
- 6 – Lifetime Income Rate
This is the rate on how much your assets can generate for you in income every year. When we ask clients how much they think they needed, every single person answered in how much they needed in a dollar amount. Not one answered in the income they would need. Studies have shown, people that have a guaranteed lifetime income live healthier, live longer, and live happier lives. It’s in the financial industry’s best interest to scare you that you don’t have enough assets. The reason is simple. They benefit from assets invested. I ask you to focus on the income you need, which opens up more possibilities. Once you understand those possibilities, you don’t have to be boxed in by retiring in your sixties. It’s a middle approach between FIRE (Financially Independent, Retire Early) folks and those that retire in their sixties or never. For our clients, we generally expect a starting lifetime income rate between 3.5% and 4% of your overall assets, if you put them in many common annuities. If you manage the investments personally, you may be able to take out 3% to 5% a year.
- 7 – Monthly retirement income needed today, after-tax
If you had no debt and no obligations, how much income would you need every month to retire today? Keep in mind, this income has to pay for your food, electricity and heat, charitable donations, insurance, property taxes, streaming services, internet, shopping needs, entertainment, and travel. One thing most people don’t add is health costs. If you have debt and obligations when you retire, those will need to covered too. This amount is dependent on where you live. If you live in a high cost area, you will need more.
- 8 – Age you plan to claim Social Security
If you find your income is coming short, you may be dependent on the steady income of Social Security when you retire. Don’t be scared that Social Security will not be there for you. You have paid in all your life. Politicians don’t want to take action to shore up the program because they are followers, not leaders. Social Security can be secured for future generations with small changes. Make sure to include Social Security in your planning. You can see this site from ssa.gov to find out more information. The earliest you can claim Social Security is age 62. Full retirement benefits are given between 66 and 67, depending on your age. You can increase your benefit up to age 70, after which there is no benefit to claiming later. The difference between benefits at 62 and 70 is a large increase in your expected income.
Many of our clients are not aware, and never bothered to register on the ssa.gov website. The Social Security Administration has made it much easier to register and check your benefits online.
Our own plan has us taking benefits at age 70 to maximize benefits. We will need a plan to bridge the gap for the decades in between, because as sure as heck, we don’t want to be working until 70. Who knows what our health, parent’s health, and mental state will be at that time. For couples, this could include one spouse partially working while the other works full time, sources of passive income, and moving to some place cheaper to retire sooner.
- 9 – Expected Monthly Social Security Income
Based on the age you plan to take benefits, how much is your expected Social Security income? Note down how much you would get at 62, 67, and 70. Be open to different possibilities. Our own journey had us retiring at 68. After going through the numbers, we found out that was way too conservative, based on where we were and the assumptions we could control.
Here’s a visual example, since I hit you with a lot of text. Items in green need to be manually entered. In this example, Spouse 1 is 45, Spouse 2 is 40. They have accumulated 500 thousand in assets, and each are able to save invest $300 per month. After 10 years, they feel they can invest $500 each per month. This is a hypothetical example, it’s not real.
This is how we calculate when they can retire.
Based on their assumptions, we can see the income they are able to generate exceeds the inflation adjusted income they needed when Spouse 1 turns 65 and Spouse 2 turns 60. There are a number of ways they can retire sooner. They can save more money every month, earn a higher rate of return, presume a lower rate of inflation, shift more money to investments, or have a higher lifetime income rate. If Social Security kicked in at 70, that will allow them to spend more on income at younger ages, knowing Social Security can make up the difference. You could even say they could retire at age 64 /59, since they are only $2000 apart in what income they needed and what income they could produce.
I will produce an Excel worksheet and upload it to the site based on my analysis soon. I’ll expand the number of rows, so you can see what happens if you start saving for yourself sooner. I’ll incorporate the age you choose for Social Security and how much you expect to get. Starting from a younger age, you need to set aside much less, since you have time on your side to help your money grow. Had I followed what I learned 20 years ago, our present situation would be much better. Hope this helps you and gives you light at the end of the working tunnel! Retirement allows many of us to do what we want to do, unleash the talents we have been given, to serve ourselves and society at large. It’s not a place to mentally atrophy, but reach our full potential.
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