The 5 Years Before You Retire: Retirement Planning When You Need It the Most | Introduction & Chapter 1: How Far Away Are You?

You’ve worked for decades, and now are so close to retirement “that you can practically taste it. And yet… you’re worried.

• Do I have enough saved?

• How do I handle being laid off late in my career?

• What taxes will I have to pay?

• Should I sell the house and move somewhere cheaper?

• What happens if I get sick?”

Birkens wrote this book to help near-retirees answer questions such as these.

Chapter 1 details the first big step toward getting an objective view of things, by answering (in dollar terms) How Far Away Are You? with a little simple math. This week will be a bit longer, but it will walk through exactly how to run this calculation for yourself.

Birken splits this into smaller steps that you can complete in an hour or less. I’ll be writing these in my own words, combining some steps, and sharing where I might differ.

Step one: Determine how much you spend.

Admittedly, this is the most labor intensive step. Birken offers a list of common monthly expenses to estimate for your projected retirement. While this might be worthwhile for those who are detail-oriented, at the least I would recommend doing this a different way first. Like a doctor who does not ask you what your vitals are but instead checks them, I prefer to not ask clients how much they spend but instead to look at their bank records.

Either look up online, call your bank and ask them to do the work, or pull bank statements and manually calculate the following for each year of the last 3-5 years.

1. How much you had in any/all bank accounts at the beginning of the year

2. How much new money came in.

3. How much you had in any/all bank accounts at the end of the year(this will be the same number as the beginning of the next)

This tells you each year how much hit your bank account for you to spend, and how much of that you actually spent (beginning balance + net income - ending balance = net expenses). For example, if you started with $30,000, had net income of $100,000, and ended with $35,000, you spent $95,000.

Get the average of all 3-5 years.

Step two: Look up future income sources like Social Security or pensions.

View your Social Security statement online at https://www.ssa.gov/myaccount/

Your pension statements should estimate what your future projected income is. Ensure you understand the assumptions, or ask us and we can help.

For example, $3,000 Social Security and $2,500 pension.

Step three: Subtract your future income sources (Social Security and pensions) from your current expenses.

For example, $3,000 + $2,500 = $5,500. $5,500 x 12 = $66,000. $95,000 average annual spending - $66,000 = $29,000

Note: this does not take taxes into account, so the real number in the example above will be closer to $55,000 net from future income sources, requiring another $40,000.

Birken calls this $40,000 your “income gap.” It’s the amount you need to generate from retirement savings.

Step four: Calculate how much you need to meet this income gap.

Birkens offers a few ways to make this calculation based on what you want to assume for investment returns. Middle of the road for her would be to divide your “income gap” by 4%. To make this simpler, you simply multiply the number instead by 25x.

For example, an “income gap” of $40,000 ÷ 0.04 (the decimal version of 4%) = $1,000,000.

Instead just doing $40,000 x 25 = $1,000,000 and is much easier 🙂

Step five: Subtract what you already have saved for retirement.

For example, if all 401k and IRAs together equal $600,000, you would need another $400,000.

Note: do not double count your pension. It’s a future income stream, not an asset to count here.

And that’s it (for now)! This tells you that before you can comfortably retire and replace your after-tax income, you’ll need to grow your $600,000 to $1,000,000. How to do this? Birken takes this up in the next chapter that we’ll examine next week.

Let us know

• If you’re not retired, what is your “income gap”?

• If you are retired, do you remember working through a calculation like this (either on your own or with a professional) before you retired?

Until next time, happy reading!