Four Numbers to Retire On

Most couples I sit down with can tell me their retirement balance to the dollar. They check it on Sunday nights. They know what it was in March and what it is now.

Almost none of them can tell me what their life costs.

That balance feels like the answer to "Can we retire?" It isn't. It's the least useful number on the page. Four other numbers decide whether you can stop working, and when. Most people have never written down a single one of them.

Here they are.

Number 1: What your life actually costs

Not your budget. Your budget is what you hope you spend. I mean what you actually spent, taken from twelve months of bank and credit card statements.

The difference between the two is almost always bigger than people expect, and it hides in the bills that don't come every month. The property tax on camp. The propane contract. Tires every few winters. The roof. The help you gave a grown kid in April. Add it all up and divide by twelve. That's your real monthly number, and it's the foundation for everything else.

Today most don’t balance a check book, review their credit card statements or evaluate their debt, it has become a lost household discipline.  Thus, as we help plan for an impending retirement getting clear on spending and creating the discipline is key to a successful transition into retirement.

Number 2: Your income floor

Your income floor is the money that arrives every month no matter what the markets do. Social Security. A pension. An annuity, which is a contract with an insurance company that pays a set income, often for life.

For most couples, Social Security is the biggest piece, and the age you claim changes it more than any other choice you control. Your statement shows the estimate at different claiming ages. Get both of yours.

Number 3: The gap

Subtract the floor from the cost. What's left is the gap: the part of your life your savings has to pay for, every month, for as long as you live.

This is where your balance finally earns a place. But only when you measure it against the gap.

Here's a way to feel the size of it. Hypothetically, a $600 monthly car payment is $7,200 a year. Using a 4% withdrawal rate as a rough planning guide, that one payment needs about $180,000 of savings standing behind it. A $2,000 monthly gap would need roughly $600,000. These are hypothetical illustrations, not a promise about what any portfolio will support.

Once you know your gap, the balance stops being a scoreboard. It becomes a question: is it big enough for this particular job?

Number 4: Your tax rate in retirement

Almost every dollar in a 401(k) or traditional IRA has never been taxed. When you take it out, it counts as income. A $1 million IRA is not $1 million of spending money. Part of it belongs to the IRS, and possibly to your state.

Most people have no idea whether their withdrawals will be taxed at 12% or 22%. Hypothetically, if $60,000 of withdrawals were taxed at 22% instead of 12%, that's $6,000 more going out the door every year.

The long drive

Nobody up here starts a January drive to Green Bay on a quarter tank because the car "usually does fine." You know the distance. You know how much fuel it takes. You know where the next open station is, and which ones close early.

Retirement is a longer drive with fewer stations. The balance tells you how much is in the tank. It doesn't tell you how far you're going, how fast you're burning it, or how much leaks out along the way. The other four numbers do.

What to do this week

1. Pull twelve months of bank and card statements. Total the spending. Divide by twelve. That's Number 1.
2. Download both Social Security statements at ssa.gov. Note the estimate at 62, at full retirement age and at 70.
3. Add any pension or annuity income. That total is your floor, Number 2.
4. Subtract the floor from the cost. Write the gap on one sheet of paper. That's Number 3.
5. Find your taxable income on last year's return. Ask your tax preparer what your bracket is likely to be once withdrawals begin. That's Number 4.
6. Then look at your balance, and measure it against the gap, not against your neighbor's.

Our Route2Retire Workbook walks through all four numbers on paper, one page each, in plain language. Reach out to request a copy of your own.

You already know your balance. Know the other four, and you'll know whether the money is as long as the road.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.