Are you on track to retire? These nine questions will ensure you are.
Let’s start by defining what I mean by retire or retirement or retirement age or retirement time. When I use any version of retire in here, I’m talking about a time where you have the choice to work for income.
Most financial experts agree on what is called a safe withdrawal rate– the amount of money that you can take from your investments at retirement age to ensure that your investments can support you for your lifetime. The agreed upon safe withdrawal rate is about 4% per year* of your starting balance of your liquid investments. If, at retirement age, you have $1,000,000 in investment funds (think 401(k), Roth IRA, Traditional IRA, brokerage) you would be able to withdraw about $40,000 a year safely.
Living on $40,000 a year is the same as $3,333 each month. This is where knowing your Bottom Line is so important. Can you live on $3,333 each month? Would you need more like $6,600 each month? If so, that means you need $2,000,000 invested. If you’re spending closer to $10,000 a month, you’ll need around $3,000,000 in investments.
How do we get 1 or 2 or 3 million dollars in investments? Time and consistency. Knowing our spending habits is critical to make sure we’re able to hit these targets and it’s why small choices make big differences.
As the wise Busta Rhymes said, “every choice comes with an invoice.” We have to be mindful about how we are using our resources and how they can support us through our lifetime – not just for today’s wants and needs, but also for our future wants and needs.
Once you are out of debt, your Bottom Line must account for retirement savings. If you don’t have a pension or some other form of income lined up that will support you at retirement, you will have to continue to earn an income. The idea behind investments is that they replace your income. Investments give you the choice to not work at some other point in life.
Let’s say that you want to retire in 20 years. Investing $2,000 a month now for the next twenty years will get you right around $1,000,000. If you’re able to live on $40,000 a year at that point, excellent. You will have choice in how you spend your time.
Mel Robbins so bluntly says, “no one is coming.” We are on our own to make this a reality. We should have Social Security, but otherwise, we need to prepare for retirement. And fortunately there are only two things to consider: income and expenses. We can earn more money, spend less money, or do some combination of the two. If you need to find $2,000 a month in your budget, look at these factors: Can I cut my expenses? Can I get more work? Can I do both?
If every choice comes with an invoice, we gotta be really thoughtful about our choices. We need to be able to see clearly how they affect us. Is the vacation now worth it? Is a bigger home? Is a newer car? Is work flexibility? Perhaps. You must know what you prioritize and make deliberate choices, and having a framework to do so can really help.
Here are the questions you need to answer to ensure you’re on track to retirement:
How much does my life cost now? That is, how much do I spend every month or do I need for a year of living (your Bottom Line).
What will my life cost at retirement time?
How much do I need to invest to be able to withdraw at the safe withdrawal rate? (for example, if supporting your lifestyle costs $80,000 a year now and you think you’ll have a similar lifestyle in retirement, you’ll need $2,000,000 invested ($2,000,000 x.04 = $80,000).
What can I do now to ensure a low Bottom Line come retirement? The easy answer to this is no debt – no consumer debt and no mortgage.
When is my preferred retirement time?
How much money do I need to invest every month to reach the number in 3 above in the timeframe I identified in 5?
Do I have this amount of money available in my budget?
If not, what do I need to do? Work more, spend less, or some combination of the two.
If I do have the money, where do I invest?
With a plan in place, you can feel confident that you are on track. I ran the numbers for our household and to be honest, we aren’t hitting the timeframe we have in mind. Knowing this (clarity is always a good thing!) allows us to make changes. We need to modify our spending plan to be able to invest more. In order to reach other goals, we also need to earn more income. With this clarity, we can make an effective plan to retire comfortably when the time comes.
* This is a somewhat simplistic calculation which assumes a 30-year retirement period. For a longer retirement period, there are additional factors to consider.