Are you afraid of Running Out of Money? 3 Golden Numbers you must know before Retiring

The biggest fear of most retirees is running out of money in retirement. Today, I'll give you three simple numbers so that you can have the confidence that you need to step into retirement. Hey, I'm Casey Weade, CEO and founder here at Howard Bailey Financial, also a certified financial planner practitioner.

And we're here to discuss three simple numbers to help you determine if you have enough for retirement. And this is an equation that all starts in one place, and that's with your expenses. There's nothing arguably more important in retirement planning than really understanding your expenses.

And there's a couple of different ways to go about determining what that expense number is for yourself. One way is to dig into the numbers. And maybe you're somebody that has a spreadsheet budget.

You have every single line item of your expenses today and projected into the future how they're going to change over time. And you've really dialed in those expenses. Maybe you've leveraged some software in order to help you really budget out what your expenses are today.

If that's the case, then you've really determined what your expenses are, probably the most analytical and specific manner possible. It'll probably give you the most accurate number. And now you need to just make some tweaks.

Maybe you know your mortgage is going to drop off as you step into retirement. Maybe you know that you're going to relocate. You're going to spend a little bit more on travel.

So just make some adjustments in order to arrive at that final number that you're going to need as you step into retirement. Now, there's also another approach. If you're like most people, you've done a good job savings.

You've been making some good money for most of your life. And so budget, what's a budget? You kind of forgot to keep that budget towards those end of the years in your career, and you're not really looking at things on a line item by line item basis. And hey, I want you to know that's OK.

For many years, we've been successfully building retirement income strategies without a very specific defined spreadsheet based budget. You can do this another way and take a look at it from a high level. In order to do that, it's pretty simple.

You take your paycheck or your take home pay that you have coming to you every single month or every single week or biweekly, however you get paid because you have your gross amount. Then you have some deductions for maybe health insurance, disability, long term care. Maybe you have some other deductions, of course, for taxes.

Maybe you're saving some dollars in your 401k. And then you have your net amount, the amount that actually hits your bank account after every paycheck. You add that up throughout the year.

You know what you collected all year long as far as take home dollars were. Then did you increase your savings? Did your savings increase outside of, say, a 401k? Outside of any of those dollars that were automated going out of your paycheck? Did you save any additional dollars? Did the emergency savings increase? Did you save something in a brokerage account? And if not, then you say, hey, my savings didn't increase. So you spent all of your take home dollars last year.

Those are your expenses. If they increased, then you can net those out to really dial in on those expenses. And as I go throughout this entire conversation today, I want you to know I want to answer your unique questions as well.

So if you have any unique questions of your own about anything that we're talking about here today, or maybe you want to see a different video in the future, just go ahead and drop those questions and comments down in that comments section. And I'm committed to answering each and every one of those. In the scenario we're going to be looking at today, we've found that this couple had expenses of $8,000 a month or $96,000 a year.

So you've added up all your expenses monthly. You multiplied those by 12. You know what your expenses are.

Now we need to move on to number two, and that comes down to your income. So when it comes to your income sources in retirement, it's important that we're focusing on all the different income sources you have outside of your portfolio. So that could be social security benefits.

That could be pension benefits you're going to have from a previous employer. Maybe you have some real estate income or other passive income sources, royalties, et cetera. You take all of those dollars that you're getting from other sources outside of your portfolio.

So we're not including dividend income here. We're adding up all of those other sources outside of the portfolio in order to arrive at a number in this scenario, which is about $4,500 a month. That's social security benefits of $3,500 a month pension of $1,000 a month.

So we have $4,500 a month in income in retirement, and then we need to determine our gap. So we have expenses of $8,000 a month. Subtract that from the income that we have coming in from social security or pension or whatever income sources you have yourself.

And then we get that gap number. This is the gap number that we need to fill. $3,500 a month is the amount that needs to come from your retirement savings.

So as we can see, it doesn't have to be that challenging to arrive at the number that you're going to need for retirement. We've made it through the first two steps. Now we're going to get to that most important number we're looking for, and that is your savings.

So how much do we need to have saved for retirement? Well, we're going to take that $3,500 a month, multiply it by our 12 that's $42,000 a year, which is our gap. And then we're going to divide it by a number of 4%. Why? Because, well, you've probably heard of the 4% rule.

The 4% rule is a standard rule of thumb for determining whether you have enough save for retirement or not. And that number is determined by 4% of your portfolio and adjusted annually for historical inflation rates. And that should result in you never running out of money in retirement within a pretty high confidence interval.

Now that's a rule of thumb. Ultimately you need to create a retirement income strategy unique to yourself, withdrawal rate for you, given the investment tools or products or strategies that you're implementing could be more or less than that 4% number dependent on a lot of different factors. But 4% is a standard quality rule of thumb.

So we take our 4% and we've divided 42,000 by that number. So we need $1,050,000 per year in order to know that we can retire. However, what if that 1,050,000 was in a retirement account? Because we haven't factored in taxes yet.

We factored in taxes when we looked at the social security and pension numbers in the income piece, that second number that we determined because we want to know what's the net social security, what's the net pension. Maybe you factored in your net rent. So we figured it out there.

But now we need to take a look at it as we're filling this gap from the portfolio. If we have $1,050,000 here and it's on a tax deferred retirement account, then we're going to pay taxes on each one of those distributions. We'll need more than $42,000 a year.

So now we have to determine what we might pay in taxes. What's your effective tax rate in retirement, not your marginal tax rate, what your effective tax rate is going to be after you factor in your federal state, local taxes, how much are you going to pay in taxes? In this scenario, we're looking at using a 20% number between federal, state and local taxes. We're going to pay 20% in taxes on the distributions that we take.

So then you want to take your number, that $42,000 a year, that gap number that you need to fill divided by 80% in this scenario. So if you said that my effective tax rate is going to be 10%, you'd divide it by 90%. If you said it was going to be a 30% effective tax rate, divide it by 70%.

And that results in the gross number that you need in order to satisfy that gap. That's $52,500. Divide that $52,500 by 4%.

Now we know if it's all going to be in a tax deferred retirement account, we need $1.3 million saved in our IRA or in your tax-deferred 401k in order to fill that gap. And I hope that this gives you some hope. This gives you a better idea of whether you have enough or not for retirement.

And you're ready to take the next step. If you find that you're roughly around this number, you're getting close, it might be time for you to do some in-depth detailed planning. Now, you know that you're there.

Now let's take the steps necessary to fill any gaps in that plan, to build a real retirement income strategy, to fill in your Medicare strategy, your long-term care strategies, your estate plan, and all of those other gaps in your plan, so that you can step into retirement. In order to take the first step, you can schedule a personal financial review with one of our fiduciary financial planners by calling the number on your screen. And we'll visit with you virtually no matter where you find yourself in the country.