5 Numbers You Need To Know Before You Retire | Episode 10

Retirement planning comes down to the numbers. Most people spend years and years saving for retirement but end up not knowing the key figures that actually determine whether they are ready to retire. Those key numbers can help bring you confidence and clarity to your retirement. This video covers the 5 numbers you need to know before you retire. Not when you retire, not after you retire, but BEFORE you retire. 

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Transcript

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Five numbers that I believe every retiree should know before they retire. Not when they retire, not after they retire. But if you're five to ten years until retirement, these five numbers you should know the answers to. Number one, how much will you actually spend in retirement? Not, well, maybe four thousand a month, maybe eight thousand a month. No. If you're getting close to retirement, we need to have a good idea of how much money on a monthly or annual basis will you be spending. Think about things like housing, utilities, food, travel, healthcare, insurance, entertainment, gifts, family expenses. Some expenses may go down in retirement, some of your expenses actually might go up in retirement, different categories. But really, the first number that you need to understand before you plan to retire is how much are you going to spend? Without knowing this number, everything else is simply just a guess. The second number you need to know is your guaranteed income. This is things like your Social Security, your pensions, your annuity payments, and your rental income if you plan to have the property throughout retirement. Why is this important? Well, if you want to spend $100,000 per year, but your guaranteed or fixed income sources are $60,000 a year, well then from your portfolio, your investments, you only need $40,000 a year to make up the difference. Whereas if you wanted to spend $100,000 a year and your fixed income sources were $20,000 a year, then you would need $80,000 from your investments each year to pay for your lifestyle. So knowing your guaranteed income number will help you solve for the retirement gap. And the retirement gap is number three, the third number you need to know. And that is simply how much you want to spend, what is your guaranteed income, subtract the two, what is the difference? That is the gap that your investments, your portfolio, the money you've been saving throughout your working career in your 401k, IRA, your taxable brokerage account, that retirement gap, that number is how much your investments need to provide to help you meet the goal that you want when it comes to your spending. This retirement gap number is very important because it helps you understand are your savings sufficient enough to retire? If you've saved up a million dollars, but your retirement gap is $100,000 a year, well, essentially you have 10 years of spending out of that portfolio before it runs dry. So maybe your savings aren't sufficient yet. Maybe you aren't ready to retire. Maybe you can't retire with that spending amount. You're gonna have to lower your spending. So understanding your retirement gap, the difference between how much you want to spend and how much your guaranteed income is, will help you understand if your investments or your savings are sufficient. And the lower that number is, the smaller the retirement gap, the smaller your investments are going to need to be to sustain you through your retirement. Someone who needs $20,000 a year from their portfolio is gonna need a smaller savings amount than someone who wants $100,000 a year out of their investment portfolio. The fourth number that you need to know is your withdrawal rate. You might have heard of the famous 4% rule, which says you can withdraw 4% out of your portfolio and you can never run out of money for 30 years. But on a year-to-year basis, what is your withdrawal rate? It's okay that some years you might withdraw 5%, 6%, 7% out of your portfolio. If in other years you're withdrawing 2 or 3%, but on a year-to-year basis, can you map it out and see how much are you withdrawing out of your portfolio? The easy way to calculate this is if you have $1 million portfolio and you withdraw $34,000 a year. You take $34,000 divided by $1 million. That is 3.4% withdrawal rate on your portfolio in that year. If you're at a 1 or 2% withdrawal rate and that's consistent throughout your retirement, you might be underspending in retirement. If you have a consistent 6, 7%, 8% withdrawal rate throughout retirement, you might have the potential to run out of money early. So what is your withdrawal rate year by year? And of course, spending fluctuates. So your withdrawal rates probably will fluctuate, but can you map it out to get an idea of what your short-term but also your long-term withdrawal rates are on your portfolio? And the fifth number that I believe you should know is your tax liability. Maybe you've saved your entire life in your traditional 401. You have a $1.7 million balance in your traditional 401. Well, unfortunately, that $1.7 million is not all yours. Uncle Sam is going to get his piece at some point. So understanding what will my tax liability be over the course of my retirement, do I have that baked in to my retirement spending? If you have money in traditional accounts, traditional 401k, traditional IRA, traditional 403Bs, just because the money's in the account doesn't mean it all belongs to you. Understanding how much you'll pay in taxes over the course of your retirement can have a significant impact on things like your withdrawal strategy, how your Social Security is taxed, how much you pay in Medicare premiums, what your future RMDs look like, and also your estate planning. When you start to look at income planning in retirement, it's not just about generating the income itself. It's also looking at how you can do that in a tax-efficient way to keep the most of your money that you've worked hard for as possible. So as you approach retirement, notice how I didn't say when you do retire or after you retire, but as you are approaching retirement five to ten years away, these are the numbers that you need to start thinking about because they can help you gain clarity and confidence on the big question. Can I afford to retire? The people who retire with confidence aren't usually the ones with the biggest portfolios. They're the ones who understand how all the pieces fit together. If you are within five to ten years until retirement, now is the time to start running these numbers, not when you retire. Thank you so much for watching, and I'll see you in the next one. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.