Trying to determine when you can actually retire? Your real retirement date depends on four important numbers: your income-producing assets, expected retirement spending, guaranteed income and how long your money needs to last.
Income-Producing Retirement Assets
Start with your real income-producing assets, not your total net worth. Count only the assets that can realistically generate retirement income, such as 401(k) and 403(b) accounts, traditional and Roth IRAs, taxable brokerage accounts, cash savings and possibly an HSA reserved for healthcare expenses.
Do not include your home unless you genuinely plan to sell it, downsize or use its equity during retirement. Cars, collectibles and an inheritance you have not yet received should also be excluded from the calculation.
Next, project the future value of your retirement assets conservatively. Use a reasonable, lower growth assumption rather than building your plan around optimistic investment returns.
Realistic Retirement Spending
The second number is how much you will actually spend during retirement. This is where many retirement plans become inaccurate.
Instead of assuming you will need a certain percentage of your current income, track your real expenses and create a realistic annual retirement budget. Remember to include occasional major costs, such as home repairs, vehicle replacements and other expenses that may occur every few years.
Guaranteed Retirement Income
The third number is your guaranteed income, the money expected to arrive regardless of short-term market performance.
Guaranteed retirement income may include Social Security benefits, pension payments, annuity income and reliable net rental income from an investment property. Knowing this amount helps determine how much income your investment portfolio will need to provide.
How Long Your Money Must Last?
The fourth number is the number of years your retirement income and assets need to support you. Planning to approximately age 95 may be especially important for married couples because one spouse could live much longer than expected.
Running out of money at age 82 and living until 92 is a financial problem that may be impossible to correct later. It is generally safer to plan for a longer retirement than to underestimate longevity and fall short by several years.
When these four retirement-planning numbers are calculated accurately, you can move beyond guessing and begin identifying a realistic retirement date based on your financial situation.
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