5 Numbers You Must Know BEFORE You Retire

Retirement planning is crucial, especially for high-income professionals who need to ensure their finances are robust enough to support their lifestyle without regular paychecks. If you're on the verge of retirement, knowing certain key numbers can make the difference between a comfortable retirement and financial stress. In today's breakdown, I'll guide you through the five critical figures you must understand to retire confidently.

If reading isn't your thing or you'd rather get this information through a more dynamic format, don't hesitate to watch our detailed video on this topic. Click here to watch the video now!

Understanding Your Annual Expenses

The Foundation of Retirement Planning

Your journey to a worry-free retirement begins with understanding your annual expenses. This figure forms the base of your retirement planning pyramid.

Detailed Breakdown Approach

The most effective way to gauge your expenses is by categorizing every penny you spend. Start with essentials like mortgage, utilities, groceries, and insurance—these are non-negotiable. Next, assess your discretionary spending such as dining out, vacations, and luxury items.

Easy Tracking with Credit Cards

For those who prefer a simplified method, using credit card annual statements can provide a clear picture of your spending habits. Simply log into your account, navigate to the statements section, and select the annual report to see a breakdown by category.

Quick Estimate Method

If technology overwhelms you or you prefer a quicker approach, use this formula: subtract the amount you save annually from your after-tax take-home pay. For instance, if your take-home pay is $300,000 and you save $50,000, you likely spend about $250,000 annually.

Importance of Expense Tracking

Knowing your expenses is crucial because it helps you estimate how much you'll need once you stop working. Remember, spending habits often shift post-retirement, so consider testing your retirement budget beforehand to ensure it's realistic.

Identifying Retirement Income Sources

Once you know what you spend, it's time to figure out where your retirement income will come from. High-income earners often find that Social Security covers only a fraction of their needs.

Common Income Sources

You might have other income sources such as pensions, rental income, or dividends from investments. For example, if Social Security gives you $50,000 a year and rentals provide another $30,000, your total income would be around $80,000.

Addressing Income Gaps

Understanding the gap between your income and expenses is pivotal. If your annual expenses are $250,000 and your income is $80,000, you have a $170,000 annual gap to fill.

Calculating the Retirement Gap

This gap represents the difference between your annual expenses and your retirement income. Knowing this helps you determine how much you need to save to maintain your lifestyle without financial strain.

Using the 4% Rule

If you apply the traditional 4% withdrawal rule, multiply your annual gap by 25 to find out how much you need in investments. For a $170,000 gap, you’d need about $4.25 million saved.

Planning Your Retirement Timeline

How long will you need your money to last? If you plan to retire early, your money will have to stretch further.

Considering Longer Retirements

With longer retirements, you must be more conservative with withdrawals and investments. Knowing your expected retirement duration helps you adjust your financial plan accordingly.

Establishing a Cash Reserve

Why You Need a Safety Net

An emergency fund isn’t just for pre-retirement. Keeping one to two years’ worth of expenses in a liquid form, like a high-yield savings account, helps you manage unexpected costs without jeopardizing your investments.

Handling Emergencies

Having a substantial cash reserve means you won’t have to sell investments during market downturns to cover unexpected expenses.

Preparing for the Unexpected

Life throws curveballs, and retirement is no exception. From health issues to market corrections, how flexible is your retirement plan?

Health Considerations

If your family history suggests a shorter active lifespan, consider retiring earlier to make the most of your healthy years.

Retirement planning is more than just numbers; it's about ensuring you have the freedom and health to enjoy your life on your terms. If you're still unsure about your readiness to retire, or if you need more detailed guidance, our video might offer the clarity you need. Watch it here and take control of your retirement planning today.