Can You Retire Now? The Complete Answer

by Neal Frankle, CFP ®

It’s entirely possible that you have enough money to retire now, but you may not know it because you may not be asking the right questions. It’s also possible that you are planning to retire now and don’t have enough money. By the time you finish reading this post, you’ll know the answer either way.

Retiring early (or retiring anytime for that matter) is just a balancing act. It starts by knowing how much money you need to retire. But you also have to understand (and control) the balance between your income, expenses and assets. This is not a minor point, so I’ll repeat it.

To retire, you need to balance your income, expenses and assets.

If you want to enjoy your retirement, you have to understand this balance really well. This is not, I repeat, NOT just a question of how much you’ve saved or how large your pension is.

Simple math explains why the balance is critical. Your retirement income is partially passive income. Passive income comes from Social Security, Social Security spousal benefits and pensions. But passive income is also a function of investment income and rental income. If you don’t have those assets, your income will be smaller.

There is of course another element of retirement income. Your retirement employment – even if it’s just with job you work over the weekend. It’s not passive income but it can be a significant portion of your retirement income. Sometimes it’s out of necessity and sometimes out of choice, but retirement employment is an important resource that should be considered.

The last component of retirement viability is your expenses. Regardless of how much income you have or how large your assets are, if your expenses are way out of line, you’ll go through your assets and income and end up working at Flippy Burger trying to “super-size” every order you can.

Let’s break this down. We’ll start with assets.

Retirement Assets

A good rule of thumb is that if you have a balanced portfolio, you can withdraw about four to five percent per year. That means if you have $100,000, you can withdraw $4,000 each year. If you have $1,000,000 in your portfolio, you can withdraw $40,000 per year. Some years your portfolio will rise far more than 4%. That’s OK. You’ll still only withdraw 4% of the year-end balance. Other years, you’ll earn far less than 4%. In fact, some years your portfolio will drop in value. You’ll still take out 4% during those years too. That’s why we only take 4% in good times and bad. In good years, you’ll build up a surplus to take care of the lean years.

The trick to making your portfolio succeed in creating your retirement income is to stay with your investments for retirement income even when you don’t want to. You have to stay with your portfolio management despite being frightened during the bad times and greedy during the good times.

So let’s start answering your main question by first asking how much you have saved. Multiply that number by 4%. That’s your annual investment retirement income. Let’s assume you have $300,000 saved. In that case, plan on withdrawing $12,000 each year during retirement. Let’s go on.

Retirement Expenses

I’m conservative, so I believe you should count on spending at least as much as you do now (plus inflation) once you retire. You may even spend more. When you retire you’ll have more time to spend money, so you probably will. Also, you may have to pick up more of your own expenses like health care, etc.

It’s very important to have a good estimate of your expenses, and the only way to do that is to know what you spend now. I’m a huge fan of using software to capture that information. (Read “You Need A Budget Review.”)

Knowing what you spend is critical to knowing if you can retire (or stay retired) or not. For our example, let’s say you spend $4,000 before tax each month. That’s $48,000 a year you must come up with.

Retirement Income

You’ll receive Social Security if you retire at the age of 62. Let’s assume your Social Security and pension income is $1,500 a month or $18,000 a year.

So, in this example, you have $12,000 in investment income and $18,000 in retirement income. That’s $30,000 in total income. But you spend $48,000. How can you reconcile the difference?

Well, you can’t create assets out of thin air. Also, you can’t magically create more passive income, Social Security or pensions. You are $18,000 away from retiring now, and you have to be flexible in the only two areas you have control over: spending and retirement employment.

It might be tough to shave $18,000 off your spending each year ($1,500 a month), but if you cut your spending by $500 a month and earn $1,000 more, you’ve got it made.

Now you see how important it is to understand the relationship between your assets, spending and retirement income.

 

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