“Can I afford to retire?”

It’s a simple question, but it has enormous implications. Planning for retirement is like completing a vast jigsaw puzzle. Your big-picture goals may be simple enough but you must fit many pieces together to get there.

Perhaps the most critical component in retirement planning is assessing your current financial situation. Over the years, you’ve amassed an array of assets and future income streams from myriad sources: investments, retirement/401(k) plans, government or company pensions, executive compensation programs, insurance policies, family trusts, rental property, Social Security and more.

Start by Evaluating Your Investments

It is important to look at the following factors when reviewing an investment strategy that supports your retirement goals:

  • Costs and Performance – What are your current investments costing you and what have they actually returned? Has it been a fair trade-off? The average equity mutual fund has expenses in excess of 1% per year, without providing additional return over a similar index fund with much lower expenses.
  • Risks – Can you minimize the investment risks you’re taking, without sacrificing the returns you want or need to achieve? Is a well-diversified portfolio part of that plan?
  • Tax-efficiency – Are your assets positioned optimally for current and future tax planning? Asset location, or positioning your investments in the proper tax “buckets,” can dramatically improve your after-tax return.

Be sure to consider the many ways that your well-managed portfolio might play out under various scenarios. For example, what if …

  • You retire sooner or later than age 65? You will need to plan for how to pay for health insurance until you qualify for Medicare.
  • Do you have to pay for large medical expenses? A Fidelity study estimated the cost of healthcare in retirement years will be $220,000 for a couple, both aged 65, retiring in 2017. (Source: Fidelity Viewpoints, Sept. 6, 2017).
  • You take your Social Security benefits earlier, later, or in staggered amounts? Taking Social Security early can dramatically impact your income in later years. In fact, for most baby boomers, delaying your benefits to age 70 rather than age 66 results in an 8% increase in benefits for each year you wait.

You’ll want to prepare a retirement cash-flow plan to fund 30 to 40 years (or more) of expected spending. Begin by listing your expected expenses and income sources, for example:

Annual Household Cash Flow:

  • Expected Annual Income _________
  • Social Security _______
  • Pension Sources (you and your spouse) +_______
  • Social Security (you and your spouse) +_______
  • Other Sources +_______
  • Total Annual Income =_______
  • Expected Annual Expenses
  • Fixed costs _______
  • Mortgage, utilities,
  • insurance, food etc. +_______
  • Variable costs +_______
  • Capital costs +_______(i.e. vehicles, vacations, travel, major home repairs)
  • Out-of-pocket healthcare +_______
  • Total Annual Expenses =_______
  • Surplus or Shortfall _______

Once you have clarified your income sources and annual expenses, subtract the expenses from the income to see where you stand. If you have a surplus, congratulations! You will be able to maintain your lifestyle without tapping into your investments.

If instead, you find yourself with a shortfall, this is where withdrawals from your investment portfolio can make up the difference. With a well-managed, diversified portfolio, the general rule of thumb is to start with a 4% annual withdrawal rate from your investments. This should allow you to continue inflation-adjusted withdrawals for a 30-year retirement. So, for example, if you have a shortfall of $40,0000, you likely need an investment portfolio of $1,000,000 ($1,000,000 x 4% = $40,000) to fill the gap.

How did the numbers add up? The answer to the question — “How much money do I need to retire?” — is a very individual one, based on your lifestyle expenses and other sources of income. Hopefully, you now have a better handle on what that number is for you.

Disclosure: Past performance may not be indicative of future results. Different investments involve varying degrees of risk; future performance of specific investments, investment strategy, or product including the investments and/or investment strategies recommended or undertaken by Strasbaugh Financial Advisory, Inc. are not guaranteed.

About the author

Susan Hodges Strasbaugh, CFP®, EA, AIF® is owner and CEO of Strasbaugh Financial Advisory, Inc.
Susan Hodges Strasbaugh

Susan Hodges Strasbaugh, CFP®, EA, AIF® is owner and CEO of Strasbaugh Financial Advisory, Inc. and has provided fee-only financial planning, investment management, and tax advice since 1998. Her practice focuses on retirement planning for professionals within ten years of retirement.

Strasbaugh Financial Advisory, Inc.
8580 Scarborough Drive, Suite 145
Colorado Springs, CO 80920