How to Know If You Have Enough Money to Retire
By Lauren Minches, Actuary, Blueprint Income
Retirement has become more complicated ever since employers stopped offering traditional pensions. Even worse, there’s an endless barrage of products, advertisements, and commercials trying to “help” you get ready for retirement. There’s enough advice floating around to create thousands of different retirements.
Before deciding which product, investments, or plan is right, you should understand the basic principles and math behind a successful retirement. So here they are…
(1) You’ll need enough income to cover your expenses… forever.
Think about how you live today. You make a certain amount per month, and you make sure not to spend more than that per month. As long as you receive that paycheck and your spending doesn’t go up, you’ll be fine.
Well, the same concept is true in retirement, except that you have to figure out where exactly the money comes from. But, if you’ve done that, and all the money you’ll have coming in adds up to more than you want to spend, you’ll be good to go. Since you don’t know how long retirement will be, you need those sources of income to be lifelong, as is the case with Social Security and pensions.
Let’s look at some quick numbers, excluding inflation for simplicity. Sam currently makes $50,000 per year and spends $40,000. When she retires in a few years, Social Security will give her $12,000 per year, and her pension provides an additional $28,000. Since those two numbers add up to $40,000, she’ll be able to maintain her standard of living in retirement.
(2) If you don’t have a pension, you’ll have to “create” additional income for yourself.
Sam’s example above was easy because she has a pension. But what if you don’t? Without the pension, Sam would only have the $12,000 of Social Security, making her $28,000 short of her target $40,000 per year.
In this case, Sam needs her savings and other investments to make up the difference. She’ll be able to “create” income from them with strategies like:
- Having savings that you simply withdraw from;
- Having savings that are invested and generating annuals gains/interest;
- Investing savings in real estate to produce monthly rental income; or
- Investing savings in an annuity that generates annual income.
Most importantly, all of the above strategies require having savings in the first place, so that’s the first thing to sort out. Then, based on how you invest your savings, you can expect some level of gains each year, but the higher the expected gains, the higher the risk that you’ll fall short or lose money. The last element is determining how you’ll get money out. The safer options are to only withdraw the gains, never touching the amount invested or to use an annuity. The other option of spending the money itself presents the risk of running out before you pass away.
(3) Use a calculator to do the math for you.
Our team at Blueprint Income has developed a calculator to help you figure out if you have enough money to retire without running out. You can access it here or click on the image below.
We’ll help you set a retirement budget, collect your Social Security benefit, any existing source of income, and the amount you’ve saved and are saving. Then, we’ll tell you if it’s enough money to cover your retirement expenses. Try playing around with the assumptions so you can see what the impact of investment returns, inflation, and lifespan are on your plan.
Now that you understand the math behind retirement, you’ll be able to evaluate your own situation and any retirement plans pitched to you, making sure they help you achieve a comfortable retirement.
This guest post is from Lauren Minches, an actuary from Blueprint Income. Blueprint Income provides guaranteed retirement saving and spending options to Americans, relieving them of the uncertainty associated with standard market investments and unknown lifespans, and enabling a secure retirement free from financial worry. More information is available at blueprintincome.com.
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