Focus: Financial - Will You Have Enough Money To Retire?

Tools, tips and tricks to determine how much money you will need for a confident Third Act

Jul 16, 2021

Calculate your income in retirement and put some strategies in place for a confident Third Act.

A month, or so, ago we talked about your budget. You’ve been diligently working to record your spending (or have an app do it) and you’ve figured out how it will change when you retire - or at least you have a stab at that calculation. Great! Now it’s time to figure out if you can afford that budget. This is where we figure out what your income will be. Most people will derive that income from investments, social security or government pensions, annuities, rental incomes and some lucky ones may have a private company pension, but some people may have other sources of income as well.

Add up your assets

The first thing you’ll want to do is check the balance on all of your savings, retirement and brokerage accounts. You can put those in a spreadsheet to track them, but I prefer to have software do that for me because it can also do some calculations that we’ll get to in a minute. My favorite is Personal Capital. This software will automatically pull in the balance for any account that you identify and it will automatically update the balance every time you log in. If you want it to, it can also keep track of your spending. There are a couple of drawbacks to Personal Capital. First, if you are using a local brokerage for your investments, Personal Capital may not have an agreement with them and you will have to update your balances manually. Secondly, they WILL call you to try to become your broker. Ignore them. They go away pretty quickly.

Calculate your net worth in retirement

OK, so you have all of your balances. The next thing you want to do is project those balances forward to when you will retire. This is called a “future value” calculation. There are lots of future value calculators on the web. Excel has a formula you can use, retirement calculators can do this for you or Personal Capital can also do this calculation for you with its calculator. If you will continue to contribute to these investment accounts until you retire, all of those methods allow you to input the annual contributions so you can see your portfolio grow by your added investments plus the interest you are accruing. There! Now you know your assets in retirement. Do the same thing for your debts. Will you still have a mortgage? How much will it be when you’re ready to retire? How about student loan debt or large balances you carry on a revolving credit line? Whatever debts you will have at retirement, subtract them from your assets at retirement. That’s your retirement net worth. Congratulations!!! You worked hard for that nest egg!

By the way, I also like the calculator in Personal Capital for calculating future net worth because it allows you to input large expenditures you will have before you retire, like college payments or rental property purchase/maintenance or even a new car every few years, if that’s your thing.

Find your income

Most retirement literature says you should assume you can withdraw 4% of that nest egg each year in retirement, some are even saying 3% these days. If you want to be (nearly) 100% sure you’ll weather every market storm that can hit and you are confident that you will want to spend the same amount when you’re 85 that you are spending when you are 65, that’s probably a good estimate. For me, it’s too conservative. I’m young enough that if a storm hits, I can find a way to earn money if I absolutely have to. I also have watched my mom’s world shrink as she has grown older. She spends a fraction at 85 of what she did at 65. I’m comfortable with something in the 5% range for my withdrawal estimate. (So, if I had saved $1M, my annual withdrawal would be $50K in the first year, and then I would assume that plus inflation for the next years.) Again, a good retirement calculator can do all of the math for you. Take the annual number and divide by 12 for your monthly income.

So, now you’ve got your income from your investments. Don’t stop there! You’ll have social security or government pension, too, for sure. If you don’t know what your social security income will be go to My Social Security and get an account and find out. If you are or were married, you may want to talk with an expert about how to best maximize your social security withdrawals. Your financial planner can help. Add that monthly cash flow to the one from your investments.

Do you have other income you’re counting on? Will you have pensions, or annuities, or rental income or spousal support, or maybe something cool like royalties? I have always planned to have a gig income in retirement. I pegged it at $1K/mo. I figure I can always work at Walmart for that amount, so it seemed safe to me, but helped me retire early with confidence.

Mind the gap

Add all of those cash flows together, or have a calculator do it for you. Now, match your income with your budget and see if the sheets cover the bed. Will you have enough income to cover the budget you calculated? If not, don’t panic! There are tons of strategies you can use to work yourself into a comfortable situation. None of them may be exactly what you envisioned, so you may have to sit with the options for a little while as you get your head around them, but if you do, you will have peace of mind and retire with confidence! So worth it!

Strategies to cover the gap

First, take a look at your budget. Are there places you can cut? Do you need to carry that car payment, or can you go with an older car for longer? Are there services you may not need in retirement if you really need to get to the bone of your budget? Can you cook at home and be healthier and wealthier at the same time? Take a good look and see if there are places that have some opportunities. If you’re concerned that cutting your budget will cut into your lifestyle in uncomfortable ways, then let’s talk about other strategies.

Another way to cut your budget is to downsize. This is financially advantageous in two ways. First, your household expenses like taxes and utilities may go down. Secondly, if you have any excess equity you can invest that and get interest on it to add to your net worth. You may get a double whammy with this strategy.

You may also be able to get the household double whammy in a house the same size if you want to relocate to a lower cost state, or even another country. There are lots of options to explore, but remember that you can’t just find a country and move there. There are laws in other countries about who can live there just like there are in this country. Do your homework if you are thinking of relocating - even in the US. You don’t want to move to Florida if you hate humidity, for instance.

You like your budget, your lifestyle, your home and your location. You don’t want to change a thing about your life. Now what? Let’s focus on the top line - the income. Is there part time work or consulting that you can do in retirement? I’ve met a ton of Lyft and Uber drivers that are retired and love getting on the open road and meeting people. Personally, I’ve got a gig curating a newsletter for a “hyper-local” news organization. It takes about an hour a day and I love it! This work can also kill two birds with one stone as some people find this work to be there purpose, as well. They derive a sense of meaning from what they choose to get paid for in retirement. Do understand how this income will impact your social security. You may want to push out taking social security or make a little less with your gig.

If you want to take it easy in retirement, put up your feet on your own deck and plan the vacation(s) of your dreams without impacting your current lifestyle at all, but you find your income doesn’t allow that, well… your best option might be to work for another couple of years. Here, again, you will get a double whammy - actually this one is a triple whammy. You can put more money aside for retirement over the years you will continue to work. Your nest egg will also continue to accrue interest that you will not draw down - so you’ll get more compounding. Finally, you will have fewer years that your income will have to sustain you in retirement.

So, there you have it! You know how much money you’ll need (budget) in retirement. You know how much income you’ll have to cover that need. You have some strategies to close whatever gap you may have. That’s all there is to this whole mystery of “how much will I need to retire?” Go off and solve the puzzle for yourself and be confident as you march into your Third Act.

Actions to Build Confidence

Tiny: Download Personal Capital and hook up your accounts.

Bold: Figure out your net worth and calculate the future value in retirement.

Audacious: Find your gap! Does your income cover your outgo? If not, rank the strategies in the order you’d be willing to execute them. What feels right for you?

Next Week’s Focus: Vacation! (Mine…)

I’ll be taking next week off, but when I return let’s talk to some other folks about how volunteering helped them find purpose.

Thanks for reading! I’m always open to your feedback! Let’s make this community what you want it to be.

Rockin' The Third Act

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