retirement

An Easy Way to See If You Have Enough Saved to Retire

Cash flow planning is a crucial part of your retirement plan, and much of it can be boiled down to one math equation.

It’s the pivotal question that all soon-to-be retirees should answer: Do we have enough saved to last us? One simple calculation can help give you some clarity.

“As you can see, at its core, cash flow analysis is a simple exercise. It’s also an incredibly important one that helps you recognize your cash flow needs and their timing.” That’s a quote from my last article, Retirement Planning Is Cash Flow Planning, where I explained how cash flow planning could prepare you for retirement. Today I’d like to lead you through a more detailed exercise that can help illustrate the process that we go through to determine if you have enough investments to support your retirement lifestyle.

One Couple’s Retirement Analysis

In this exercise, we’ll use a hypothetical couple who both recently retired at age 66. After completing an extensive review of their expenses, they determined that their cost of living is $54,000 a year, not including income tax. Their combined Social Security benefits equal $40,000 a year, and they have no additional income (pensions, part-time employment, etc.). At the beginning of their retirement at age 66, they have $550,000 in after-tax investments. To keep this example from becoming too complicated, we’ll assume that this couple does not have any IRA or 401(k) investments. If they did, we would need to plan for required minimum distributions and taxes on distributions from those plans.

If the taxes on their investments and Social Security are $8,000 per year, their total cost of living would be $62,000 ($54,000 plus $8,000). Their expenses ($62,000) outweigh their income ($40,000) by $22,000 a year.

A Revealing Retirement Math Equation

Does our couple have enough in investments to cover that shortfall and carry them through retirement?

Generally speaking, they can find out by multiplying that $22,000-per-year annual shortfall by 25. I call the product of that mathematical equation the “Magic Number,” because it’s an amount that should provide the income needed to last throughout retirement at a 4% withdrawal rate per year. In our hypothetical couple’s case, their magic number is $550,000. That means that 4% of $550,000 equals the $22,000 that they need to support their retirement lifestyle.

With careful planning and discipline, we believe they should probably be fine. If they had less than $550,000 in investments, we would suggest they cut their cost of living, find other sources of income, delay retirement, or some combination of the above.

Your Results May Vary

This is a very simple example, which is for general guidance only. When working with clients, we use a more detailed version of the above exercise that adds variables such as inflation, tax brackets, expenses and money coming in the future, an emergency fund, insurance, etc. We also suggest the cash flow plan be updated at least annually, or as situations change.

Investment activity is one of those changing situations, and a more detailed analysis should also address the account losses that can accompany account drops. For example, if an account drop caused our hypothetical couple’s investments to fall to $400,000, they would need to reduce their cost of living or get part-time work to make up for the fact that the new amount that they can withdraw at 4% is $16,000, not the $22,000 that they were taking out.

We seek to address this problem with a buy, hold and protect investment strategy, which is designed to protect your principal and any gains that you have made. A stop loss for your stocks would be an example of a “protect strategy.” Such a strategy, though not perfect, is intended to protect investments during bear markets.

As you can imagine, I strongly advocate you utilize a buy, hold and protect strategy if you are retired or retiring soon. But no matter your investment strategy, it’s wise to prepare for retirement by analyzing your potential cash flow and making any necessary changes.

About the Author

Ken Moraif, CFP®

CEO and Senior Adviser, Retirement Planners of America

Ken Moraif, CFP, is CEO and senior adviser at Retirement Planners of America, a Dallas-based wealth management and investment firm with over $4.3 billion in AUM and serving over 8,000 households (as of May 2019). He is also the host of the radio show "Money Matters with Ken Moraif," which has offered listeners retirement, investing and personal finance advice since 1996.

Most Popular

The 15 Best Stocks for the Rest of 2022
stocks to buy

The 15 Best Stocks for the Rest of 2022

The lesson of the past two years: Be ready for anything. Our 15 best stocks to buy for the rest of 2022 reflect several possible outcomes for the seco…
June 21, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The Best Bank for You, 2022
Making Your Money Last

The Best Bank for You, 2022

Check out our list of the best candidates for your next financial institution based on interest rates, fees and other features.
June 23, 2022

Recommended

Retirement Comfort: How to Avoid Running Out of Money
retirement planning

Retirement Comfort: How to Avoid Running Out of Money

When it comes to retirement planning, one thing all of us worry about is whether we will have enough money to last. Financial professionals can help y…
June 25, 2022
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
June 23, 2022
10 Most Tax-Friendly States for Retirees
retirement

10 Most Tax-Friendly States for Retirees

Moving to a low-tax state in retirement can help make your retirement savings last longer.
June 23, 2022
Taxes in Retirement: How All 50 States Tax Retirees
Tax Breaks

Taxes in Retirement: How All 50 States Tax Retirees

We rated every state, plus the District of Columbia, on how retirees are taxed. Some of the results might surprise you.
June 23, 2022