Common Sense Financial Podcast
Episode 51–Most Important Retirement Number (Not How Much Money Is In Your Portfolio)
Most people think about what investments they should be making or what stocks they should have in their portfolio when they approach retirement age, but they are going about it backwards. Brian Skrobonja breaks down the calculations you need to make in order to understand how ready you are for retirement and what your retirement plan needs to factor in to be truly financially free.
- How do you know when it’s safe to retire? The answer depends on your plan and understanding the most important numbers in retirement.
- Success is the result of following a plan to fruition. The more specific the plan is, the higher the probability of reaching the goal.
- If you’re on the cusp of retirement, you may have a number of new questions and concerns starting to enter your mind. Are you invested in the right assets for retirement? How much should you be withdrawing from your accounts? Do you have enough saved up to last your whole retirement?
- If you search the internet, you’ll end up finding a lot of often contradictory advice. If you want to get a good sense of direction, take our complimentary Retirement Readiness Quiz. The quiz will ask you a series of questions to help you gauge how ready you are for retirement and give you an idea for what you still need to work on.
- One of the most important numbers you can know when it comes to retirement is your income needs. When you understand what level of income you need to afford everything in retirement, it’s much easier to work backwards from there to figure out what you need to create that flow of income.
- Total up all your bank payments, insurance, tax, and monthly living expenses. Include your regular expenses throughout the year as well because the total you’re looking for is how much money you will spend over a year.
- Keep in mind that your income needs in retirement will not be the same as they are when you’re working. Be sure to think about how you’ll be spending your time in retirement because you will have a lot of time to fill.
- Once you have your income needs for the year calculated, subtract your Social Security and/or pension benefits, and any other fixed income. What’s left over is your income gap.
- With the income gap number you can calculate how much of your invested retirement money is required for retirement income. This will also tell you the yield you need to achieve to fund your lifestyle from the assets you have.
- This figure shouldn’t be more than 4% or 5%. Any higher and you considerably increase the risk of running out of money before you run out of life.
- You also have to factor in inflation on top of market volatility and healthcare expenses. If you stretch your resources too far right off the bat, you are setting yourself up to run out of money much sooner than you would otherwise. When making these calculations it’s best to err on the side of caution.
- Inflation will continue to be a major factor going forward. Using a historical figure of 3.5% inflation each year, we can estimate that over the course of 15 years, your income will depreciate by 68%. This is why you need two pools of income for retirement, one for income now and another for income later.
- The key is in finding income-producing assets, particularly ones that are pegged or indexed for inflation. This can be done either actively (getting a part time job, buying a business, owning a rental property) or more passively (annuities and other similar investments).
- Formulate a plan that articulates where you are, where you’re going and what needs to be done to start receiving the income you need.
Mentioned in this Episode: