Finances
Retire Ready – A 3-step check to determine your financial retirement readiness
Money and retirement go hand in hand. Some of the biggest concerns that retiring people have about their money is whether or not their finances will support the kind of retirement that they hope to have, and for as long as they live.
Many people go into retirement quite blind about their financial retirement readiness. They don’t bother to take a look at what they have, or to plan out the best way to maximize what is there. But remember what we have talked about in other posts: the key to a successful retirement is planning. It is only by taking a good, hard look and creating a plan that success in retirement can become a reality.
Checking on your financial readiness for retirement can be done in 3 steps. The results will give you a good report of your financial health as you enter retirement.
Step #1: Take stock of your stocks
When you are preparing for your new life of retirement, it is necessary to take a good look both at what you have, and also at what you do not have. Pretending you know or burying your head in the sand about your finances will keep you from maximizing everything that is there.
So what kinds of money are available to you? What are your potential sources of income as you cross into retirement? The usual sources of income typically come from the following list:
- 401K
- IRA
- Roth accounts
- Non-retirement investments
- Non-retirement savings accounts
- Pension
- Social security
Other possible sources of income include:
- inheritances
- individual stocks
- annuities
- income from rental properties
I encourage you to write down the value of all sources of income that you personally have, add up the value of each, and the sum of that, my friend, is your nest egg. I hope you are pleased with the number. If you are pleased, read on, and if you are not pleased with your financial numbers, read on.
Step #2: Count the costs
The next step in determining your retirement financial health is to figure out how much your living expenses will be in retirement. These expenses are typically your monthly costs of living, plus any discretionary spending you do. Write down your monthly costs for each of the following, plus any extras you have that are not listed here:
- housing
- utilities
- food
- transportation
- charitable giving
- clothing
- medical expenses
- taxes
- entertainment / travel
- debt
Step #3 The big reveal
Once you have added together your monthly living expense numbers (step 2), go back to your nest egg numbers (step 1), calculate the amount that these investments are generating annually, then divide by 12. Compare how this monthly income number matches up with the amount you have determined you need monthly in retirement.
Ideally, the monthly return on your nest egg supports the monthly amount of your living expenses. This means that the principal value of your investments stays intact, and you are able to live off the increase in value that is generated by your sources of income. When this is the case, you can live to be 130 without worrying about running out of money, because you are able to live off the surplus alone, and the value of your original nest egg doesn’t dwindle.
If you are arriving at retirement with this scenario — the ability to live off only the interest of your income sources — then you are in great financial health, and I congratulate you! That is the target goal, and you achieved it. Well done!
But perhaps you ran the above numbers and instead of shouting out “Hooray!” you groaned “Oh no!” Well then, take a big breath and realize that your retirement can still turn out quite successfully. Also, realize that you are far from alone. The vast majority of folks find themselves needing to spend down their nest egg throughout retirement since there isn’t enough money coming in to live off the gains alone. That is often called “scrambling” the nest egg, but I say the right approach is rather to “coddle” the nest egg by devising a plan to make it last well and long.
Everyone needs to coddle their nest egg in a way that is very personal for them. Longevity is the critical variable in this equation, so consider your likely life span based on family history, your lifestyle, and any current medical conditions. Figure out what is a likely lifespan number for you, then divide the value of your nest egg by the number of years you likely have left. Yep, it’s not much fun to actually look at the number of Christmases you probably have left, but this is an essential step to keep it all real.
Your nest egg amount, divided by your years remaining, divided by 12 months, added to the monthly return on your investments is the income you have to work with each month throughout your retirement. Hopefully this number coincides with the amount you have determined that you need to have each month for all of your needs and many of your wants. Once the amount you need monthly is equal to or less than the amount coming in, you are golden.
If your income still does not support the amount you need each month, then you are not yet retirement ready, and more coddling is needed. To get there, your income must be increased and your expenses must be decreased until the numbers match.
One of 3 paths
When someone discovers that their financial health is not what they hoped it would be in retirement, there are typically 3 paths that person can now take:
Path #1 is to deny the reality of insufficient finances, live beyond one’s means, and make the situation even worse by blowing through the money far too quickly. These folks tend to be fun for a few years, then they have to retreat to a life of uncomfortably dire straits.
Path #2 is to pout about the financial situation, make themselves and those around them miserable with their poor attitude, and bitterly acquiesce to eating peanut butter sandwiches and ramen noodles. I’ve spent time with these people, and it tends to be one prolonged pity party.
Path #3 is to face the numbers with courage, find some ways to adjust income and costs, and live creatively and lovingly within the re-aligned financial means. These people, though not wealthy, tend to have rich and satisfying retirements. I love being around these folks.
Getting our just desserts
There is an analogy that I like to use to show that, while money is essential, it is truly only one ingredient in the recipe for a great retirement. It also shows the things that are just as important, or even more important, than money.
I see money in retirement as being equivalent to the leavening agent in a cake. Leaven is typically the yeast, baking powder, or baking soda that makes a dessert rise and be fluffy. So if money is the leaven, then I would say that good health is the flour, well-chosen activities are the sugars, and quality marriage and friendships are the butter and eggs that go into the batter.
Money is only the leaven, not the whole essence of the cake. Showing up to retirement with a dozen bags of leaven but no provisions for flour, sugar or eggs makes for a miserable retirement, indeed. It is only when all aspects of retirement are planned for that the results are satisfying.
Please stick with me as I continue this analogy of “just desserts.”
Some cakes and pastries use a great deal of leaven in their recipe, such as angel food cake, lemon glazed bundts, and sky-high chocolate souffles. The folks who arrive at retirement with an abundance of money are the ones who get to enjoy these delights, which in real life look something like 2-week cruises and $200K motor homes.
But arriving at retirement age with a modest amount of money does not mean that a person gets no sweet treats in retirement, figuratively speaking. Although there may be fewer finances, the money available is still a leavening agent, and many desserts require only a modest amount of it. So the people with only moderate amounts of money can still enjoy double-layer frosted cakes, cherry streusels, and the cinnamon-pecan roll types of retirements. A likely equivalence would be one-week summer get-aways to the beach, and spending every Christmas with the grown kids and grandkids.
Even those with barely-there amounts of money, if they make the absolute most of their other “ingredients,” can enjoy the sweeter things in life, too, in the form of cookies, crepes and kringles, which are quite delicious indeed. These treats might look in real life like backyard BBQs, and movies out with good friends.
Ideally, a well-balanced retirement involves all 3 types of these “just desserts,” but if your retirement supports only one or two types, then retirement can still be very happy and enjoyable. Just don’t forget that the most important aspect to enjoying retirement – whether there is a lot of money or only a little — is to maximize the other “ingredients” of retirement: friendships, marriage, activities, health, and giving back.
Lifestyle is the Key
The most important way to sustain your retirement readiness is to live a lifestyle that is in synchronicity with the funds you have available. I encourage you to take a bit of time at the beginning of each month to look at the amount of income you have coming in, and decide purposefully how you will spend it that month. In this way you will live a lifestyle in accordance with your means.
Using a spreadsheet or a simple piece of paper, start by recording what your monthly income is for that month. Next, before you spend an actual dime, spend the full amount down on paper, all the way to zero. Start with the essentials first, then move to the variable spending, then finish with the fun extras. The following is an example:
Income: $3600
Housing 300 : for property taxes; mortgage is paid off
Utilities 375
Food 425 : groceries only; eating out is in entertainment category
Transportation 80 : gasoline; cars are paid for
Charitable giving 200 : 150 to church, 50 to other causes
Insurance 225: auto and homeowners
Medical 400
Clothing 100
Entertainment / Dining out 200
Debt 0 : became debt-free in 2014!
Travel 500 : for trip to grandson’s baptism on the 15th.
As you can see, in this example, the basic wants and needs have been covered. But we still have $795 left, so we keep spending it down on paper until we reach $0:
“Dream trip” savings account 500
529 college fund for grandson 200
New curtains for guest bedroom 60
Take recently widowed neighbor out for lunch 35
__________________________________________
Amount remaining: $0
Now we are done. Every dollar has been accounted for, and every dollar has a very valuable assignment for this month. Next month, do it again, since each month is unique with its own tasks and assignments. This is especially important since income from investments can vary, and therefore the money you spend should be adjusted to the income as needed.
This method of money management, called zero-based budgeting, is the best way to be purposeful with your money and to give your money its most potent spending power. It is a very valuable tool to manage one’s money, and its use is worthwhile for both rich and not-so-rich people during retirement.
If you are looking for a digital way to manage the above numbers, I highly recommend Everydollar.com. It is a very user-friendly app that has both a free version and an upgraded version. It truly is a game changer for managing one’s finances, especially throughout retirement. It is designed for people of all income levels, and I have used it for years.
Note: As you can see in the above example, this individual’s financial scenario would be much different if they still had a mortgage or were carrying payments on cars. Entering retirement with debt on these or other items is one of the quickest ways to sink one’s financial future in retirement. Do all you can to have these debts paid off prior to retiring, or work to knock these out as quickly as possible in the early stages of retirement. Once these debts are behind you, life can soar!
Your take-aways
There you have it: a 3-step check to retire ready, plus a zero-based budget method for managing your monthly income and outgo.
While it has been essential to look at what we have looked at today, it is also sad that so many people focus only on the money parts of retirement. They don’t realize that the greatest riches in retirement come by finding contentment in the everyday. Being of the mindset that only expensive cruises, daily golf outings, and frequent dinners at the country club will bring happiness to retirement will ravage finances quickly, and that mindset actually backfires and leads to greater discontentment in retirement.
I encourage you, no matter what level of income you have, to find joy in the everyday experiences of sipping coffee as the sun rises, hosting your grandchildren for playful tea parties, and walking hand-in-hand with your spouse around your neighborhood. These are what make for a rich retirement, whether one has much money or very little.
Retirement questions to ask yourself as you assess your financial retirement readiness:
Do I know the value of my nest egg? Have I calculated the value of my investments and other retirement streams of income?
Have I assessed in specific ways my monthly financial needs and wants? How much do I really need to live comfortably and happily in retirement?
Does my income in retirement support my monthly needs? If not, what adjustments do I need to make? Do I need to reduce my expectations and thereby reduce my living costs, or should I find ways to increase income? Should I do both?
What are some lesser-dollar and no-dollar ways that are available to me that generate high-returns of satisfaction and engender feelings of being rich in the ways that matter most to me?
Have I ever used a zero-based budget? How about I use one starting today?
What am I doing to prepare for the other aspects of retirement besides the financial: family, friends, marriage, recreation, emotional, physical fitness, brain health, and leaving a legacy?
Please share any thoughts or ideas you have about financial retirement readiness in the comments section on this page.