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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{ 8 comments… read them below or add one }

ron mccartney August 18, 2013 at 12:58 PM

I am 63 years old got my own place, don’t drive, don’t take dear holidays. wont have much of a private pension. but I have over 200.000 in savings, have I got enough to retire now.

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Neal Frankle August 19, 2013 at 1:38 AM

How much do you spend on average each month? What is your total income? How is the money invested? Thanks…

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Ronald Dodge January 4, 2011 at 10:14 PM

For me, I did the self study dealing with retirement, retirement funding, retirement risk factors, and employment risk factors while also taking into account of life circumstances. As such, to have a 98% chance of retiring relatively comfortable (note, that’s 3 standard deviations on a normal bell curve for those that are stat nerds), I ended up devising the following rules:

Retire with total after tax based investable assets being a multiple of 50 of annual wages (note, this is to take into account of longevity and market risk factors mostly, but this is also to help cover for in the event you end up having to live in a nursing home for a period of 10 years due to a long terminal illness like Alzheimer’s Disease, which my grandmother had for 15 years with the last 10 of it in a nursing home. If you think LTC will take care of this expense for that long of a time period, think again.)

Withdraw only 2% of total investable assets per year (Again, this is on account of market, longevity and LTC risk factors)

As a result of the RMD rules, have at least 75% of your total retirement income (note this is of all retirement type accounts, not your annually taxable accounts) in ROTH IRA(s) within the first 5 years of retirement if allowed by law. RMD rules don’t kick on the ROTH IRAs until the owner (and spouse of the owner is married) dies via the inheritance rules.

Have a minimal of 25% of “Actual Gross Earned Income” go into countable savings, though given there are bad financial years, should really shoot for the 40% mark, so as you have excess savings banked for those bad years.

Countable savings are net contributions into retirement funds (Don’t just count your own contributions, but also your employer’s contributions into your retirement funds, though you will need to add the employer’s contributions to the gross income reported on your pay stub), net debt reduction, and net contributions into an emergency fund (note an emergency fund is made up of several types like necessary living expenses for the next year, other cash demands for the next year such as on debt, asset replacement/repairment from normal usage over time, sudden losses rather if that be income, assets, or health for what ever reason that created the sudden loss. The only other items not included in here is wealth building outside of retirement funding, but your EF can eventually break out into that once you have accomplished all the other stuff via that 25% minimal of actual gross earned income going to countable savings.

Note, as far as I’m concerned, any income earned off of investments is not considered as countable savings, but if you take it out of the investments (other than to pay for income taxes related to that investment income), that withdrawal is counted against that investment, which reduces your countable savings just like adding more debt is counting against your countable savings.

Another reason why I also assume such a huge amount go to countable savings, the SSA benefits is expected to get chopped. The SSA office says it would be by 73% under the do nothing plan, but I suspect the issue is far greater than what they are admitting to knowing human tendencies. As such, I assumed no income from SSA benefits even though I know it will still be there, but the real question, by what level of benefits compared to now? 50% in the 2040’s of what they are now in relative terms (that is after *REAL* inflation has been taken into account)?

After all, the 3 legged stool analysis of retirement is anything but reliable. After all, corporate pensions been chopped away (for those that did have it with the company and it went to the PBGC, those benefits to such retirees has been chopped to 50% level in most cases. SSA benefits leg is also severely at high risk of being chopped severely, so the 3 legged stool can no longer stand anymore. As such, it’s now what I call the bean bag chair analysis. The more beans (dollars) you put into your chair (Retirement funds or wealth building accounts), the more likely you are to be relatively comfortable when you retire.

One thing I learned, if you have to assume, err on the side of worst case scenario, but also make do with what you have to work with.

Of course, employment risk factors also had some aspect of taking that saving rate up to 25% of actual gross earned income. The big one for me, earned income has NOT kept up with TRUE NECESSARY LIVING EXPENSES.

As for the market risks that I mentioned about, what if you end up retiring at the top of the market peak? As such, during the last 10 years, you should be gradually working your way to 80% equity and 20% Cash/Bonds, but once you transfer money into the Cash/Bonds via rebalancing annually, when Cash/Bonds makes up more than 20% of total investable assets, don’t transfer back from bonds to investments. That 20% gives you a 10 year cushion should you need it. The 80% is to keep up with the effects of taxation and inflation in the long run, should you end up living multiple decades in retirement.

Don’t get me wrong, this does assume one end up having to do this saving plan for a 40 year time frame not counting the first 5 of employment years for someone fresh out of college with huge education debts with very low income. It may very well take every bit of those 5 years to get out of that dire financial straits before one can start saving for retirement.

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Ronald Dodge January 4, 2011 at 10:17 PM

Correction, I should have typed, level of SSA benefits would only be 73%, not chopped by 73% according to the SSA office.

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retirebyforty January 3, 2011 at 12:10 PM

I also think inflation will be a huge part of retirement expense in the long run. That’s why I’m looking at acquiring more rental properties to help with passive income.
What is your target $$? I post my financial targets last week if you’re curious.
Good post!

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krantcents January 3, 2011 at 10:06 AM

Inflation, whether identified or not will have a huge effect on retirement in the long run. Additional income is one way to help that.

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JoeTaxpayer January 3, 2011 at 8:14 AM

I’m with you on the 4% Neal. Haven’t studied how the last decade handled that withdrawal rate, but I suspect on a well balanced portfolio, it survived.

The replacement ratio is so, so tough. We save 20%+ of our gross. Currently, another 15% goes to the mortgage. You get the idea.
The mortgage will be gone well before retiring, and of course, we won’t be ‘saving for retirement’ while in retirement. Not to mention the expense of raising a child.
So, my own advice is to track one’s spending. Do it for a full year to catch bills that may be quarterly or annual as well as some random repairs. This will at least let you see what goes away at retirement.
Then, add the new hobbies/travel that will kick in. And don’t forget health insurance/health care needs. Hopefully this will still be less that those expenses that fell off.

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Neal January 3, 2011 at 10:58 AM

Joe. Nice savings man. 20% plus of the gross is sweet a kimbo. We have a $$ amount that we have to hit. I have it automated so it comes out of our account before we buy anything. Works for us.

Hey…are you going to retire to California? I would love to have you as a neighbor!

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