Find Out in 5 Minutes If You Have Enough to Retire
It’s a common question these days: My portfolio is way down. Can I still afford to retire? To calculate a ballpark answer, here’s a quick and easy exercise.
![Hands holding one-hundred dollar bills](https://cdn.mos.cms.futurecdn.net/oqPavwuRKmBtxtMkfdLt6M-415-80.jpg)
My 4-year-old daughter loves working around the house to earn money. Perhaps we’re a bit early with these lessons. Nevertheless, when she earns money, it goes into an envelope with the words “baby doll” on it. One thing that kids understand that adults seem to have forgotten is that money itself has no intrinsic value; it is what it affords us that actually matters.
As adults, we tend to forget this until we face imminent transitions, such as buying a home, sending our kids to college, and the big one: retirement. When our portfolio gets hit by a big downturn, we start to question whether we can still afford the goal.
In the next few paragraphs, I’m going to teach you a five-minute exercise to see if you have (about) enough to retire. Note that there are lots of rules of thumb and assumptions in this exercise that may not apply to you. If you want this to be much more complicated, it can, and probably should be, if you’re going to decide to walk away from work. But, if you just want a spot check to see where you stand, this should do the job.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. Figure out your expenses
If you make more than you spend, you have earned the luxury of not having to budget. Budgeting is not an exercise that people enjoy. Unlike your working years, budgeting in retirement is not optional. Pull out too little money and you’ve unintentionally paid for your kids’ country club memberships. Pull out too much and you’ll run out.
Here’s a simple trick: Look at two years of annual statements from your bank accounts. Divide the total debits by 24. That’s it. This is an accurate portrayal of your monthly expenses. This should encompass everything except what you pay for before it hits your bank account (taxes, health insurance premiums, group life insurance, etc.).
2. Gross up the monthly amount to account for taxes
It’s likely that the majority of your retirement savings will be taxed in some shape or form. Roth IRAs and municipal bonds are notable exceptions.
If your monthly expenses are $10,000 and your effective tax rate (how many cents you lose on the dollar to taxes) is 20%, divide $10,000/0.8, to arrive at $12,500 per month. That’s the gross amount you’ll need every month to end up with $10,000 in your bank account to cover your expenses.
3. Subtract Social Security and other fixed income streams
Let’s say that you and your spouse are receiving $5,000 per month from Social Security. This leaves a gap of $7,500 per month ($12,500-$5,000) that needs to come from somewhere else.
If you have a pension or annuity, subtract those figures out, too. Let’s say for this example there is a pension of $2,000 per month. Therefore, we need to take $5,500 per month from our investments.
4. Divide by 4%
The next, most important question is how much we need saved up in our investment account in order to be able to pull out that amount each month. The 4% “rule” has gotten more widespread attention in the last year as inflation has spiked and markets have tumbled, with folks wondering if it still works. There are lots of different retirement income strategies that, in my opinion, are more effective for withdrawing your savings. However, I have found nothing better that the 4% rule to quickly determine whether you are in the range of having enough money saved.
Using the numbers from step three, you’ll have to multiply $5,500 X 12 to get your annual shortfall amount: $66,000. Divide $66,000/0.04 (4%) and you’ll get $1,650,000. If this example is your exact situation and you have more than $1,650,000, you probably have enough. If you have much less, you’ll need to work longer, spend less or find some other way to stretch your savings.
5. Verify for your situation
As I have repeatedly pointed out, this is just a back-of-the-envelope framework. Here are a few of the major things that could throw it off:
- If you retire before you claim Social Security. In that situation, there is a gap between the income streams and the paychecks, which would cause a higher than 4% withdrawal rate in the early years.
- If you need long-term care late in life. This is a risk for almost everyone. It can be offset by insurance or by earmarked investments. Either way, it will create a need for more money.
- If you have a really low risk tolerance. Bill Bengen, who created the 4% framework, assumed a 50% stock/50% fixed income portfolio. If you’re not willing to have 50% of your money in stocks, you’ll likely have to withdraw less.
A financial plan is your road map. It will tell you if you have enough, (mostly) confirm that it will last, and point out any other gaps in your situation. It’s imperfect and life is always changing, so I would not walk away without a plan to confirm the numbers.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published