The question I’m most often asked is, “Will I be able to retire?” In this episode of the One for the Money podcast, I answer that question and share ways to know you’re on the right track. In the tips, tricks, and strategies portion, I explain how a simple rule can help you track your progress towards retirement. Listen to learn more!

In this episode...

• Well, it depends… [01:06]
• Determining yearly expenses [03:37]
• Income sources [04:56]
• The 4% rule [05:44]
• How much will you need to save? [07:28]
• High impact factors [09:19]
• The rule of 72 [11:50]

Where to start

As a Certified Financial Planner, people often ask me if they’ll be able to retire. That question is imperative to ask now, because now is the time to make adjustments in saving and spending. The few years prior to retirement are generally too late. We need to consider many factors to determine readiness for retirement. Of course, these factors are based on assumptions, as we’re making forecasts about the future regarding rates of return, inflation, healthcare expenses, and life expectancy.

There are some standard benchmarks we can use such as starting retirement at age 65 and living to age 90. That would mean 25 years of retirement. My financial planning practice focuses on early retirement, but we can make modifications from that initial baseline. Determining how much you need to retire starts with considering how much will be spent each year. That number is generally higher than one might think.

Expenses in retirement

More people are taking mortgages into retirement. For those who don’t take a mortgage into retirement, their houses tend to be older and require more repairs and maintenance. Transportation costs will remain the same if the person leases vehicles. Insurance and other costs will be factors if the car is leased or owned. Any additional expenses such as heat and air, electricity, subscriptions, personal care, food, and internet will be similar to now and will increase with inflation.

Healthcare and leisure expenses increase significantly in retirement, especially healthcare. A couple, on average, spends over $250,000 a year on healthcare in retirement. A Fidelity study found that people should expect to spend between 55% and 80% of their pre-retirement income each year through retirement. Interestingly, the higher a person’s pre-retirement salary, the smaller the percentage of working income would need to be replaced when they stop working.

Sources of income

After calculating approximate expenses for a typical retirement, the next step is determining the sources that produce that income. First, we would add up what is sometimes called “mailbox income.” This income comes in regularly, including a pension, social security, and rental income. We would then subtract the annual amounts of this steady income from the total amount needed for spending each year. The difference between those is the income investments would need to produce.

How do we determine how large an investment nest egg needs to be? The 4% rule is a distribution rule derived by financial planner Bill Bengen. This rule has been adopted by many in the industry because of its simplicity. It was created to meet the financial needs of a retiree, even during a worst-case economic scenario such as a prolonged market downturn. The rule was developed using historical data on stock and bond returns over the 50 years from 1926-1976, focusing heavily on the severe market downturns of the 30s and early 70s.

Bill Bengen concluded that even during untenable markets, no historical case existed in which a 4% annual withdrawal exhausted a retirement portfolio in fewer than 33 years, which bodes well for early retirement. The 4% rule was tested during some challenging decades, notably the Great Depression, World War Two, and the...