How do I know if I have enough money to retire? Maybe you’ve asked yourself that question. Many people do. People who have retired, 77%, 68%, depending on which survey you look at, say, “Hey, I feel like I’ve got enough money to retire”, but people who haven’t retired, I’m talking particularly now to the Gen Xers, people who are 59 years of age and younger. Those of you who haven’t retired yet, only 45% of you are certain that you have enough money to retire. Could be you still have some time to grow your portfolio, could be you’re just not close enough to really focus on it yet, or could be you’re just really afraid because it’s something you’ve never done before.

Give me a few minutes today. I’m going to try to address some of the reasons and some of the ways you can know if you have enough money to retire.

Okay, let’s roll up our sleeves and get to work. The first thing you need to do if you’re going to decide if you have enough money to retire is you’ve got to look at what you’re spending right now. That’s called your budget. How much are you spending on a monthly basis? Now, some of you throw up your hands and say, “Well, I’m not retired yet, so how do I know what I’m going to spend in retirement?” Well, you start from the known to the unknown and you have to figure out what you’re spending right now. When I walk through people in our conference rooms when we’re building a retirement blueprint with them for their retirement, when I walk people through that, they’re shocked many times at some of the things they’re spending money on, things that they say is too much money on, and they’re shocked when they look at their budget sometimes and say, I can’t believe we’re only spending that much money on that.

That’s what a budget will do for you. It’s not a restrictive thing or a belt to tie around to make you suck it in necessarily. It’s just to lay out where your money’s going and what you’re spending it on in pre-retirement. Once you know that you can take a blank budget sheet and you can say, “what’s going to change when I retire?” Maybe your mortgage is not going to change, but it’s only going to go for four more years, and you’ll have the house paid off and no car expense. Don’t expect to have your last car right before you retire. You’re still going to have car expense as long as you’re able to drive, but you understand what I’m saying, line by line, item by item, you can work down a budget worksheet and say, “This is what I’m spending now, and this is what I will need for retirement”, then you’ve got your target.

Okay, so we’ve got the target. That’s what we need on a monthly basis. Now let’s go and let’s see how much income flow we have coming in. Some people call them ladders that you can turn on. Some people call them various things. I like to call them spigots. It’s just a spigot you can turn on to get more and more income flow. So you need to look at your social security because you generally have a social security. About 98% of the people have social security of some form. If you’re married, you need to consider both your social securities because one is the breadwinner and one is the lower amount. So you need to consider both of those in the income flow. Do you have a pension? Does your spouse have a pension?

If your single, it may seem simpler because you can really just look at your expenditures, and your situation, but you’ve got to then look at what income flows you have. Do you have rental property? Have you put aside money into an annuity, an income annuity that’s going to produce income in the future? Maybe you’ve heard it isn’t good to have annuities. Hey, that’s the whole subject of the whole section we’re talking about. Social security is an annuity. Your pension is an annuity, and an annuity is an annuity. So what kind of income flows do you have? What kind of spigots do you have that you can turn on at different times? Now, in the first section, we had our budget, we figured out the amount of money we need every month. Now we’ve got the income flow, and we have the amount of money that’s coming in each month.

So when I have what I need and I subtract what I have coming in from what I need, then I know if number one, there’s a gap that I’ve got to make up, or number two, there’s a surplus. Hopefully there’s a surplus. But if not, if you follow this process, step one, step two, you now know what your gap is going to be in retirement. So once I have my needs and then I have my income and I know if there’s a gap, how do I fill the gap? Well, that’s when the major thing you probably focused on all your life comes into play. That’s your lump sum. How much have you put away in your 401k, your 403b, your plan at work, your IRA, your Roth IRA, whatever you’ve saved your retirement money in. That’s where you will have to pull money to fill that gap. You have to go to that pile and see what’s the best way to take that pile of money, that lump sum that’s there and turn it into the additional income you need to fill the gap.

Many people use annuities because an annuity is something that’s going to pay you a guaranteed income for the rest of your life. The good news about filling the gap of your income needs from your lump sum is you can consider dedicating some of your lump sum, maybe 20% to 25% of your lump sum, and dedicate a certain amount of that lump sum to your income to take care of your paycheck for the rest of your life. You say how? Remember your Social, maybe a second Social, a pension, rental income, and that annuity, and then you’ve got your income, your paycheck for the rest of your life and the rest of your money is left for your “Play check” for you to go and enjoy your retirement during the go-go year. So that’s how you use your lump sum.

You tell it what to do. That part of it, I want it to fill the gap of my paycheck. The rest of it is my play check to go and enjoy and to live the rest of my life. That money can stay invested in the market. The other part, and you can take part in the market gain to your risk level, but you need to realize the position that the lump sum plays and it’s secondary to how much you need.

I want to mention one more thing. Yeah, we could talk about healthcare. That’s major. Yes, we could talk about taxes, and we do on other shows, but the last thing is something you need to address to help you really know if you can afford to retire.

You know what your income flow from your existing sources are, so the other thing I have to mention is the big negative. What are you carrying in debt? If you are going into retirement, it’s like you’re going into a retirement race because you’re trying to outrun life and make sure that you have enough money to last for the entire lifetime. It may be 85 years of age, 90 years of age, 95 years of age. When are you going to pass away? Only God knows. So you’re running that race, and if you’re running that race and you’re carrying debt, it’s just like strapping on an extra 10 pounds, 15 pounds, 20 pounds. It’s going to wear the machinery out.

It’s going to wear your knees out. It’s going to cause you to be out of breath faster. It’s going to be more difficult for you to get there. So if you’re over here in pre-retirement and you’re looking at retirement saying, how do I know if I have enough money to retire? One thing you need to consider is how much is your debt? Is your debt going to drain on your retirement income flow if you need an extra $2,000 or if you’re paying for two cars and a student loan and a mortgage?  You say, “Well, I need an extra $6,000 in retirement,” well then, that’s going to drain the entire system even faster. It’s going to make your needs way higher. It’s going to make a bigger gap when you figure out what your income flows are and it’s going to drain your lump sum even faster.

So one big thing, if you’re three years, four years, six years, seven years away from retirement, you need a retirement plan. Part of your plan right now needs to be how do I get rid of the debt? How do I enter into retirement where I’m running that race and I’m unencumbered by any kind of debt. The house is paid for, the car is paid for, but what about the deduction? The deduction is not nearly as freeing as having it all paid for and being able to just run the race. I liken it to running the low hurdles every month because yeah, you’ve still got bills, but they’re low hurdles versus running the high hurdles where they almost have to stop and leap over those hurdles month by month by month, get the debt done. If you really want to know if you can retire, you’ve got to consider how much debt am I carrying with me into retirement?

So let me review. I know I’ve done it several times, but let me go over it one more time. Number one, you’ve got to look and see what are you needs? What’s your budget? What are you spending on a monthly basis? Number two, you’ve got to assess what are your income flows going to be from social security, a pension, a rental, or from a flow from some other annuity or something that you’ve put in place beforehand? Number three, that’s when you go to the lump sum that you’ve built up in the 401k, and you direct the gap to be filled for your income with maybe an annuity, maybe putting it into a safe bucket where you’ve got three to five years’ worth of money over there, but you have to address your paycheck in that third step from your lump sum. And then whatever’s left in your lump sum, that’s your play check to go and enjoy.

And the one thing that’ll drag all of this down faster than anything else is if you don’t address your debt. How much are you going to have to pay in debt and how long are you going to have to pay in debt on a house mortgage, on a car, on a parent plus loan? Those kind of things. Those are the major components you need to focus on if you’re really trying to decide if you can afford to retire.

Hey, I promise you every week, if you’ll give me a few minutes, I’ll do my best to increase your financial knowledge and if we can help you particularly about a situation, a question, anything you’ve got, go to the website, get an appointment, give us a call. We’ll see you next time or again.