5 Numbers You Need to Know Before You Pull the Trigger on Retirement
Photo by Mika Baumeister on Unsplash
Have you marked your calendar yet? I met with a client a couple weeks back and within 2 minutes of sitting down he rattled off his date. January 6th, 2023. That’s the last day he intends to walk into his place of work. When I meet with a prospective client for the first time, I always ask what their date is. I usually get a puzzled look followed by a “well I’ve never really thought about it.” People tend to fall somewhere in the middle of two extremes when it comes to retirement; either they’ve never thought about it (maybe because they don’t intend to ever truly retire) or they have a countdown on their phone to the exact minute they will walk out of their place of employment for the final time. No matter where you are, there comes a point when we all start thinking about what retirement will look like. Part of what makes my job so fun is that no two retirements look exactly the same. I have a client in her 90s who just went bungee jumping in New Zealand, a couple that sold their home to travel the country in a camper and a lady whose new pastime is reading to children at a nearby elementary school. Retirement means something a little different for everyone. No matter what retirement will look like for you, there are a few numbers you should have in the back of your head as you prepare. The five numbers I’m going to talk about today will help prepare you for a financially stable retirement, whether you’re bungee jumping or journaling in your backyard.
- Your projected social security benefit. Your social security benefit is based on your highest 35 years of earnings and is indexed for inflation. If you visit the social security website (which I will link below) and set up an account, you can view your projected benefit in real time. This benefit will be based on your current wages and is not always perfectly accurate (your wage and employment status may change in the future), but it gives you a good idea of what you’ll be receiving in retirement. It also clearly lays out what your benefit will be should you choose to take early or delay social security. I encourage all of my clients to check this out for two reasons. First, having a general idea of what their benefit will be helps us to plan. Second, we always check for accuracy. The social security office is made of up human beings who (unfortunately) make mistakes. I had a client a few years back who earned $106,000 that was erroneously inputted as $10,600. An error like that can have a significant impact on your benefit. Keep in mind, if you are or at one time were married, you may be eligible for different benefit amounts (if you have further questions on that, feel free to reach out).
Social Security website: www.ssa.gov
- The rule of 4%. Four percent is currently the number most commonly referenced as the sustainable withdrawal rate. This number has changed and is subject to possibly change in the future, but currently, 4% is the number. Academic research show that you can safely withdraw 4% of your properly invested portfolio each year without subjecting yourself to the risk of running out of money. For example, if you have a 401K with $500,000 in it, you can take $20,000 a year in retirement for living expenses. We put this number in front of our clients at their first appointment so they can do the simple math on their own. If they want to be able to draw $40,000 a year out of their portfolio, they need to save $1,000,000. It is a quick rule of thumb to keep in mind when planning.
- A monthly budget. There’s that awful B word again. My retirees are my very best budgeters. Once you pull the trigger on retirement one of the scariest realities is that there are no more paychecks. Short of a re-entering the workforce or finding out you have a rich uncle who included you in his will, the money you have is what you have and you have to make it last. By starting to work on your budget early and adjusting it as you get closer to retirement, you’ll have a very accurate picture of your spending when you do pull the trigger. This coupled with the 4% rule gives you a good idea of how much you need to have saved.
- Healthcare costs. But healthcare is free once you qualify for Medicare, right? Unfortunately, no. While some people do qualify for premium-free Medicare, some do not. You’ll also need a supplement plan to help cover some of the costs that Medicare does not cover such as copays and deductibles. It’s important to know what your healthcare costs will be in retirement, especially now, when those costs are at the mercy of political change.
Medicare website: www.medicare.gov
- Mailbox money. This term is one that we use in our office a lot. Mailbox money is any income that comes to you every month that is not directly dependent on anything you do or on market performance. Social security, for example, would fall in this category. This also includes any pensions, guaranteed annuity payments, royalties, things of that nature. These incomes sources help to create a floor for your spending in retirement. They are reliable funds that we see as coverage for mandatory expenses. The more mailbox money you have the less dependent you are on your portfolio’s performance.
Whether retirement is twenty years away or five, we encourage our clients to keep these key numbers in mind as they prepare. Knowing these numbers helps our clients create realistic expectations and gives them goals to work towards. While our clients are busy dreaming up their perfect retirement, our job is to come alongside them and, by using these numbers, create a framework to fund those dreams. The numbers are our jam, the dreaming is theirs. If you have questions about your numbers specifically or need help digging deeper into how we use these to implement a plan, give us a call. We are always happy to help.
Opinions expressed are those of Molly VanBinsbergen and are not necessarily those of Raymond James. All opinions are as of this 10/25/19 and are subject change without notice.
