The 15 minute retirement readiness review

 the 15 minute retirement readiness review

Quick note:  Greetings from home base (a.k.a. Omaha).  I’m back home after several weeks of travel through Colorado, Oregon, Washington and Vancouver.  While I get caught up, I thought I’d post an article that I wrote recently for Dow Jones MarketWatch.  It has some great info on gauging your progress toward retirement, but my apologies to those of you who may have already seen it.  Stay tuned for more in the coming days as I process some insights from the trip and ease back behind the writing desk.

It’s summer vacation time again and all across the fruited plain kids are pestering their parents with that age-old question: “Are we there yet?”  Any answer other than “Yes” prompts the inevitable: “How much longer?” 

When I was a kid, my parents would answer that question with an educated guess or just tell me to quit asking.  Nowadays we have GPS devices which, as near as I can tell, use a scientific process called “Magic” to determine where you are and exactly how much longer it will be until you reach Walley World.

Wouldn’t it be nice to have a similar device that could tell you how close you are to having enough saved for retirement?  Knowing where you are puts your savings into context, provides incentive and lets you know when you need to make adjustments.  A trusted adviser can provide you with a detailed retirement readiness review for your unique situation, but if you want a quick, back of the envelope way to gauge your progress, ask yourself the following three questions:

What will it cost?

We all have different plans for retirement, so there’s no one answer to the question “How much is enough?”  A popular rule of thumb, however, is that you’ll need about 85% of your pre-retirement income during retirement in order to maintain your standard of living. 

Multiply your current income by .85.  If you were to retire today, that’s approximately how much you’d need to pay the bills.  For example, if you’re making $75,000 now, you could bid work adieu and get by on about $63,750 due to fact that increased spending on things like healthcare would be more than offset by reduced spending on things like taxes, 401(k) contributions and office birthday parties.

It’s important to note that the 85% Rule is a bit of a minimum standard.  If your retirement plans involve things like expensive travel or hobbies, you might want to plan on replacing a greater percentage of your income to avoid running out of money.  Also, if you’re many years away from retiring, you will want to adjust your income for inflation before calculating the 85% replacement ratio.

How will I pay?

Now that you know about how much income you’ll need, it’s time to take a few minutes to figure out where that money will come from.  Some are lucky enough to have a pension, but most will need to rely on a combination of savings and Social Security to fund retirement.

Recent research by Aon Hewitt shows that a person will need Social Security plus savings worth about 11 times their annual income in order to hit the 85% benchmark discussed earlier and maintain their standard of living through their retirement years.

Charles Farrell did similar research several years ago and concluded that the typical person should aim to have about 12 times their annual income (plus Social Security) saved for retirement.  To track your progress, he suggests having 3 times saved by 45 and 6.5 times by 55.

With that in mind, divide your assets by your income.  What’s the number?  If your goal is to have an asset/income ratio somewhere around 11 or 12, how are you doing?  Are you on track or do you need to make adjustments (e.g. save more, change your asset allocation, work longer, downsize your plans)? 

For a more detailed review of your finances, you can download a free Financial Checkup Checklist at www.intentionalretirement.com/checkup.

What will I do?

Money is important, but it’s a means to an end.  As Emerson once said: “The desire of gold is not for gold.  It is for the means of freedom and benefit.”  I doubt that your end goal is to have a bunch of money.  More likely, it is to use that money to have and do the things that bring you joy, meaning and purpose. 

Your retirement is more than just a math problem.  Save all you want, but you won’t truly be ready for the next phase until you have a good idea of what you want to do.  Think about your ideal day in retirement.  What do you want to do?  Who do you want to be with?  Where do you want to live?  As you answer those questions, the non-financial aspects of your retirement will come into focus.

So how are you doing?  Are you there yet?  If so, great!  Send me a postcard.  If not, keep at it and continue to gauge your progress until retirement comes into view.

7 Responses to “The 15 minute retirement readiness review”

  1. Jean August 8, 2013 at 5:02 pm #

    That 85% rule seems to assume that people are living paycheck to paycheck, spending pretty much everything they earn. I live on slightly more than 1/3 of my gross income, with a little less than 1/3 going to taxes and the remaining 1/3 going into savings. My estimate of my monthly expenses in retirement is about the same as my current monthly budget, so less than 40% of my current income.

  2. Joe Hearn August 9, 2013 at 12:56 pm #

    Hi Jean. Yes, the 85% rule is definitely a rule of thumb. It won’t apply to everyone. Since the article was published I’ve talked to several people who live on considerably less than they make. For them, 85% is probably going to be more than they need (all else being equal). The best way to determine your specific need is to work through a retirement budget, which it sounds like you’ve already done. That will give you a more accurate projection for your unique situation.

    BTW, great job on your savings! Keep up the great work and touch base if I can ever help.

    Joe

  3. Anthony August 11, 2013 at 10:02 pm #

    I’m in a similar position as Jean (above). We wive well below my annual salary, so this calculation works out perfectly, if I cut my salary in half, which I have no intention of doing. I guess for folks like us, we need to look at an actual annual cost of living vs. income, which is different for those living paycheck-to-paycheck. It quickly becomes a very complex calculation.

  4. Joe Hearn August 12, 2013 at 3:09 pm #

    Great point Anthony. I wrote a post that included a case study awhile back that you might find helpful. You can read it here: http://intentionalretirement.com/2012/07/case-study-when-can-i-retire/.

    In addition, there’s a chapter in my book “The Bell Lap” that takes you through a detailed analysis of how much you’ll need to retire. That might be helpful as well.

    Thanks for reading. Keep up the great work on your planning!

    Joe

  5. Ron September 27, 2013 at 8:15 pm #

    I’m really sick of these studies and “rules of thumb” that are all based on the pre-retirement income side of the equation. Just like with the government we need to take a harder and realistic look at the spending side of the equation. That’s what is going to determine how much you really need, not some arbitrary rule of thumb based on assumptions that do not apply to folks that are paying attention and know how to say no to frivolous spending.

    • Joe Hearn September 30, 2013 at 9:55 am #

      Hi Ron. You’re right, rules of thumb will only get you so far. There’s no substitute for have a detailed analysis of your specific situation. I’ve written several things that go down that path as well. See my response to Anthony above or check out the Archives page here at the site. Thanks.

      Joe

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  1. Here is how much you should have saved for retirement by now - Intentional Retirement - March 25, 2015

    […] plus 11-12 times their annual income in savings when they retire (for more on this topic read “The 15 minute retirement readiness review”).  So the chart above can give you a rough idea of how much you should have saved for […]

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