How Much Is Enough?

When you get to your 50’s and 60’s, thoughts turn to retirement.

Since we’re among the first of our friends to take the leap, we’re having a bunch of fun conversations.  Friends are trying to figure out when they can join us.

Mr. Ms. Liz tells them to do it sooner than later.

My friends think I’m crazy but one of the big reasons I retired early is that Mr. Ms. Liz’s Mom died at 64.  Mr. Ms. Liz just turned 61.

If he were to follow in his Mom’s footsteps, we have three more years.  There are a slew of reasons why this won’t happen (smoker, non-exerciser, poor eater etc.) but it was on my mind.  If we have three more years, I want them to be three years focused on FUN, not three years focused on work.  And we were ready–financially and emotionally.

You don’t know how many good years you have left.  We know few people who have a great quality of life after 75.  So we say make it happen sooner if you can.

Our friends have two questions.

They want to know what we do with our time and how much money it takes to retire.

The time part is surprisingly easy.

I spend a ton of time doing two things that weren’t even on my pre-retirement radar–pickleball and blogging.  If I weren’t doing this, I’m sure I would have found something else.

And when you have time and hang out with other people with time, impromptu activities occur–lunch today?  well, yes!  pop over for a visit and a drink?  well, yes!

And when people know you have time, they ask for help.  Hang out with your fake grandchild?  well, yes!  Volunteer for an organization you want to support?  well, yes!

For me, the secret has been being open to new friendships and seeking out active social opportunities.

Being comfortable with some downtime helps too–reading and playing games can fill a lot of time–and it’s good for your brain health.

Mr. Ms. Liz has been crossing off things that have been on his to do list for years–rebuilding the sprinkler system, planting a new wildflower garden, and working on the house and lawn.

Money is the hard part.

Most people don’t know how much money they spend and what they spend it on.

There are rules of thumb–80% of your income is a common one.  We all need 80% of our income to retire.  So if we made $60,000 a year, we need $48,000 a year in retirement.

But this makes no sense.  I lived on 30% of my take home pay my last full working year and saved the rest.  So I certainly didn’t need 80% of my income to retire.

Deciding when to retire is a HUGE decision, if you screw this one up, it could be bad.  So you need to do some work.

Figure out how much money you spend and what you spend it on.

If you’re not already tracking your spending, this will take some work.  This was easy for me because all of my spending since 1992 is in Quicken.  Yep 1992–geek alert!

Go through your bank and credit card statements.  You should be able to download your transactions for the year and put them into Excel.  Then categorize the transactions–housing, utilities, cell phone, medical, auto, groceries, clothing, entertainment, vacations, dining, gifts, etc.

Figure out your retirement budget.

What expenses will change in retirement?

What will you spend more on?  For me, health insurance, entertainment, dining out, vacations, computers (goodbye company computer),  and vehicle (goodbye company car) expenses went up.

What will you spend less on?  For me, not much went down.  I’m no longer dressing up for work so maybe clothes.  Though saying I dressed up is a stretch–I love mountain casual!

Don’t forget taxes–you’ll be paying taxes on the gains on your investment sales, social security, pensions and other income sources.

What expenses will you have that are not annual?  Car purchases come to mind.  I pay cash for my cars so every 8 years I need to have enough money set aside for a car.  If I add 1/8 of the cost of a car to my budget each year, I can transfer that money to my car savings account.  Think about replacing computers, furnaces, roofs, etc. and include a fraction of that eventual cost in your annual budget.

Total it and add a contingency–my contingency is close to 10% of my budget.  Most years, this will not be spent, but every few years I may have more medical expenses or a major home repair that I’m not prepared for.

Write it all down or, better yet, put it in a spreadsheet.

For me, it was super important to have a cushy retirement budget–one I could easily follow.   This was a way I could take some risk out of my decision to retire.

My retirement budget is almost double what I actually spent the last full year I worked.  And I’m on track to spend much, much less than budget and earn a bit more.  Yippee!

But no one knows you better than you do–is it more important to retire earlier and are you comfortable with a bare bones budget?  Is the thought of finding part-time work to supplement your spending just fine?  Then build your bare bones budget.

Figure out your net investable assets.

This is your net worth less anything that won’t be sold to support your retirement.

If you include any vehicles, jewelry, or electronics in your net worth and these will not be sold, remove them to calculate your investable assets.

If you don’t intend to sell your home, remove it’s value to calculate your investable assets.  I intend to downsize my home and sell my vacation home so I include a portion of my home and all of my vacation home in my investable assets.

Calculate the amount of spending your investable assets can support.

The safe withdrawal rate is the rate you can withdraw from your investable assets each year and ensure that you have a high probability of never running out of money.

The Trinity Study says that you can withdraw 4% of your invested assets in the first year of retirement then increase that amount each year based on inflation.  96% of the time, you will end with more money than you started with.

Few things in life are completely risk free so I’m comfortable with a 96% likelihood on this one.  But I’m only comfortable because I have a few fallback plans like reducing my spending or downsizing early that I discussed in my How I Knew I Could Retire post.

Calculate 4% of your investable assets.

If you have $1,000,000 of investable assets, you’ll be able to support $40,000 of spending in year one and increase that spending by inflation each year.

Compare the result to your retirement budget.

Not enough?  Keep working and save more or figure out how to spend less.  You’ll need to save 300 X each monthly expense to support it in retirement.

For example, if you have a cell phone bill of $100 a month, you’ll need to save $30,000 to support that expense in retirement.  $30,000 X 4% is $1,200 a year or $100 a month.  Reduce that bill to $40 a month and you’ll only need to save $12,000.

Enough but just barely?  How flexible can you be?  Can you earn more if you need to?  Can you spend less?  Can you be more aggressive with your investing?  If yes, start planning your retirement.  If no, keep working and save more or figure out how to spend less.

Enough with some extra cushion?  Start planning your retirement.  Educate yourself on investing.  Figure out how you will spend your time.  Start practicing–take a week long staycation and test out your plans.  Start a list of things you want to do in retirement.

And do some more calculating–maybe seek some professional advice.  Run your numbers through a retirement calculator.  Stress test your results with lower investment returns and/or higher inflation.

Just try to avoid the one more year syndrome.  You don’t know how many good years you have left.


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Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

2 thoughts on “How Much Is Enough?”

    1. Thanks Lance! I agree–living on less supercharges your retirement plans. It allows you to save more and means you’ll need less to retire. Win-win in my book!

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