Calculate How Much Money You’ll Need to Retire

In Articles, Articles: Kansas City Office, Articles: Salt Lake City Office by Scott Dougan

Planning done well should feel like a state of flow. Money flows in, money flows out; the rate of this flow is determined by your chosen lifestyle. Ideally, your lifestyle conforms naturally to your desires and needs, as they shift with your health and interests. Thus your accumulated assets should provide you with enough income (flow in) to match your expenses (flow out). It’s this state of flow we’re after, but we need your help to make it happen.

One of the determinants of the success of a retirement plan is the amount of income that a given portfolio can generate. That’s a big part of what we do for you. But the other side of that equation, the ‘flow out’ is ultimately up to you. That is, the amount of expenses you generate is all on you. So, when I ask an aspiring retiree what they intend to spend each month once retired, I often get an uncomfortable shift in the chair, followed by a “We’re not quite sure yet.” So with that in mind, I’d like to offer two methods with which to determine your likely amount of expenses in retirement. At least as a starting point.

Method 1 (the fast way):

Simply add up total household income while still employed, subtract retirement plan contributions and monthly savings (after all, you don’t need to keep saving once retired), taxes paid, and any work-related expenses. This number should be close to your current lifestyle cost. From there, it’s much easier to make adjustments for changes to expenses when retired, like health care, Medicare Supplemental Insurance, travel, less dining Retirement out (or more), etc.

Method 2 (the slow way):

With this method, you’ll pull out all credit card statements, checkbook registers, utility bills, insurance statements, etc. Your goal here is to account for every expense you have, for at least a three-month period. This allows you to see trends in spending and also avoid missing any quarterly payments, like car insurance. It’s this method that connects you more closely with your money because it brings you face-to-face with each and every expenditure you have.

One very useful exercise to do when using this method is to look at each expenditure, or category of expenditures, and ask yourself, “Is this an area that gives me fulfillment commensurate with the amount I spent?” In other words, do you get as much joy from this expense as you’d like to receive? Maybe you should spend less in this area? Conversely, is it an area that you should spend more money on?

Here are some examples. Many years ago, one of our clients worked in a corporate job that they very much disliked. They realized they were spending $2.00 each afternoon to buy a 20-ounce soda from the company cafeteria, as a reward for making it through the day.  Since they weren’t quite ready yet to give up the habit altogether, they started buying it by the case from the store and bringing one from home each day. This way, it cost them just a dollar each time they drowned their work sorrows in caffeinated bliss, saving them a couple hundred bucks each year. More importunely, the exercise was like holding up a mirror to themselves and convinced them to eventually quit their miserable job and find another that was a better fit and more enjoyable!

On the flipside, the same exercise showed them that they were effectively spending nothing on their favorite hobby each year. Here they were, passionate about woodworking and they weren’t investing a single dime on that passion! This proved to them that they had allowed themself to drift away from some of the things that brought them joy and replaced them with activities that stripped them of their joy. What had happened? All of this from what sounds like a silly budgeting exercise!

Your Next Move

As is so often the case, the fast way may be faster but it may not be the best way. If you’re looking for a way to both better understand how much money you’ll need to cover your retirement expenses, and a way to better align your passions with your dollars, choose the slow way. Either way, regaining perspective of your money can help reignite some of those passion areas in your life that may have been dormant for too long.

Retirement planning has a lot to do with planning your money wisely. It should also include a heavy dose of planning your life wisely. After taking a closer look at how you use money to support your life, I hope you’ll see opportunities to invest more in being the you that you’ve always wanted to be, and not the less-than-you that may have slowly crept in when you weren’t paying attention. All of this is possible by looking at credit card statements? Try it and find out for yourself.

Investment Advisory Services offered through Elevated Capital Advisors, LLC. An SEC Registered Investment Advisor.

This newsletter/commentary should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. There is no guarantee that any investment plan or strategy will be successful. All references to potential future developments or outcomes are strictly the views and opinions of the author and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets.