3 Critical Numbers You Need to Know Before Retiring

Retirement planning can feel overwhelming. With all the projections, what-ifs, and complex calculations, it's enough to make your head spin. But what if I told you that you could get a pretty good handle on where you stand by focusing on just three key numbers?
 
As a financial advisor, I've found that this simplified approach can make retirement planning much more manageable for most people. Let's break it down.
 
The Three Essential Numbers
 
1. Your Portfolio Value
 
This is the total of your retirement savings and investments. It includes your 401(k)s, IRAs, investment accounts, and savings accounts. Think of it as your financial cushion for retirement.
 
For example, let's say your portfolio value is $1,520,000. Using the traditional 4% rule as a starting point suggests you could safely withdraw about $60,800 per year. However, modern retirement planning uses more sophisticated methods to create a tailored withdrawal strategy for your situation.
 
2. Your Fixed Income Sources
 
This refers to the regular, guaranteed income you'll receive in retirement. Familiar sources include Social Security, pensions, and annuities. These provide a foundation for your retirement income.
 
For instance, you might expect:
- A pension of $1,000 per month
- Social Security of $1,300 per month starting at age 67
 
Understanding these income sources is crucial, especially when planning to bridge gaps between early retirement and when benefits like Social Security kick in.
 
3. Your Retirement Expenses
 
This is what you expect to spend each year in retirement. It's about covering basic needs and funding your retirement goals and dreams.
 
Many retirees need about 80% of their pre-retirement income to maintain their lifestyle. However, this can vary widely based on individual circumstances. Don't forget to factor in potential increases in healthcare costs as you age, as well as any big plans like travel or hobbies.
 
Advanced Planning: The Guardrails Approach
 
Once you have these three numbers, modern retirement planning goes further with a "guardrails" approach. Think of it as a lane assist in your car - it helps keep you on track but with some flexibility.
 
Here's how it works:
 
1. We start by calculating your initial spending capacity based on your portfolio value and fixed income sources.
2. We then set up two upper and lower rail guardrails.
3. If your portfolio performs well and crosses the upper rail, it triggers a spending increase. It's like getting a raise in retirement!
4. If your portfolio dips below the lower rail, we must reduce spending to keep the plan on track.
 
This approach allows you to spend more in good years while providing a safety net for more challenging times. It's dynamic, adjusting to real-world conditions rather than sticking to a rigid plan.
 
The Power of Spending Capacity
 
Spending capacity is a critical concept in modern retirement planning. Considering all your income sources and assets, it's the amount you can safely spend each year in retirement.
 
Advanced planning software helps calculate this by considering the following:
- Your portfolio value and expected growth
- Your fixed income sources
- Your risk tolerance
 
The beauty of this approach is its flexibility. As your situation changes - maybe the market has a great year, or perhaps you decide to do some part-time work - we can quickly recalculate your spending capacity.
 
This means you can make informed decisions about your spending. If a significant expense arises, like a dream vacation or helping a grandchild with college, you can see how it might impact your long-term plan.
 
Wrapping It Up: Your Next Steps
 
So, there you have it - three critical numbers brought to life with a dynamic, flexible approach to retirement planning.
 
Of course, everyone's situation is different. That's why working with a financial advisor can be so valuable. We have the tools and expertise to help you make sense of your unique financial landscape and create a personalized retirement plan.

- Seth Deal