It may be phrased differently, but the question that I am most often asked by prospective clients is: Can I retire?
The folks asking the question are generally anywhere from their early 50s right up to their early to mid 60s. Some are still 15 years away and want to ensure that their savings and planning are on track, for others they are much closer and have not really ever taken a look at their situation.
The initial meeting
During my initial meeting with the prospective client I try to understand their retirement goals and if those goals are realistic. In order to do this I ask them questions along these lines:
- How much do they have saved for retirement in their various accounts such as their 401(k), IRAs, brokerage accounts, etc.?
- How much are they saving each year for retirement?
- Are their investments aligned with their situation?
- Will they receive a pension when they retire?
- How much will they receive from Social Security?
- Do they have significant stock options, restricted stock, or a non-qualified retirement plan at work?
- Do they own their company all or in part and if so how much would they anticipate receiving from the sale of the business?
- Do they anticipate working for pay either full or part-time during retirement?
- And probably the biggest question: How much do you anticipate needing to support your desired retirement lifestyle?
There are many additional general questions to be asked and even more based upon the nuances of the prospective client’s unique situation. At this meeting my goal is to understand their situation and to see if their expectations for retirement are realistic.
The 4% Rule
Essentially we start with their nest egg, both actual and anticipated. For a rough estimate, I use the 4% rule. Simply stated research by fellow NAPFA member Bill Bengen states that most retirees can safely withdraw 4% of their initial nest egg and expect to have their money last them for at least 30 years. What does this mean?
- Someone with $500,000 can withdraw $20,000 per year
- Someone with $1 million can withdraw $40,000 per year
- Someone with $2.5 million can withdraw $100,000 per year
To be clear, this is a rule of thumb, an estimating tool. Like all rules of thumb the 4% rule should not be confused with a full financial planning analysis.
This is step one. Let’s say one has accumulated $1 million and needs $85,000 from all sources to support their anticipated lifestyle. We know via the 4% rule that they should try to limit their withdrawals from their retirement savings to about $40,000 so they have a gap of $45,000.
$85,000 – $40,000 = $45,000
Let’s assume that between the husband and the wife they expect to receive $40,000 from Social Security at their full retirement age. This leaves a manageable gap of $5,000 which we will work to close should the prospect become a client.
Based on this conversation my initial assessment would be that their retirement aspirations are realistic, but certainly there are no guarantees of success.
If this same couple had indicated that they needed $125,000 from all sources to support their lifestyle clearly this is not a realistic expectation and I would have told them this. I haven’t had many conversations of that type, but they are difficult.
The In-Depth Analysis
The 4% rule is a handy estimating tool. However, once a prospect becomes a client we look at their situation in greater detail to determine if they are on track or if adjustments need to be made.
All of the questions listed above (that apply) are examined. Depending upon how close to retirement the client is we will look at their anticipated expenses in detail. We also look at any and all special situations unique to the client that might impact their retirement spending needs. Lastly we take into account that retirement spending is not generally linear for the duration of their retirement. What this means is that early on retirees might spend more on travel and “toys.” As they age there lifestyle might slow down, but medical and related expenses might increase.
We work with the client to guide them as to how to take withdrawals from their various accounts. Does it make sense to take money from taxable accounts exclusively or should they draw upon a mix of taxable and tax-deferred retirement accounts? Should they take Social Security as soon as they are eligible or should they wait until their full retirement age (or later)?
Can I Retire? This is not a simple question to answer. Moreover it’s not just about being able to retire, but rather can you retire “in style?”
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The biggest concern I have is the gap from when I retire until I start collecting pension/SS and Roth/401k. I don’t think I’m going to make it to 62 in my industry, so if it’s say, 55, I need to bridge several years of living expenses until I can start collecting fixed income benefits accrued. So, my focus will have to be to start setting aside some funds in taxable accounts and savings and hopefully, still have some side income available via real estate or the blogging gig. But that’s 20 years out, so who knows what side income opportunities will look like that far out?
Thanks for the comment. I dare say the next 20 years will be both interesting and challenging on the retirement planning front. The concerns you express are pretty typical for those contemplating early retirement. The other major concern has been the availability of health insurance coverage either at all or at least at an affordable price to bridge them until Medicare. That may or may not have been addressed via Obamacare, but even if that is repealed hopefully that issue will be addressed in some form.
From following your blog I dare say I would bet on you being successful in your journey to retirement.
Not too long ago, I did a piece about how I don’t want to retire. Of course, we’re kind of a special case. I spent a few years on disability, and it’s terrifying to live on such a fixed income ($800 a month in Seattle) and know that you can’t really affect it. It’s also a huge blow to the ego.
Maybe I’d feel differently if we had more money set aside. As it is, we have spent the last six years digging our way out of debt from student loans and medical bills. (My husband also has health problems, and he’s actually on disability now.)
So I have an amazing boss who works around my condition and who pays me well. I just can’t see wanting to leave that. Then again, since I’ll probably always be the main wage earner, maybe I am just being more realistic than anything else.
Thanks for comment and for visiting the site Abigail. You make a great point in that retirement has many different meanings for different people. This can range from “gone fishing” to continuing to work out of need, interest, or both. As we all live longer and in many cases stay in good health longer this will continue to evolve I’m sure. I briefly checked out your blog and I really like it, I will look for the article you mentioned specifically.
Roger, I enjoyed your article with one exception – you’ve used the word “perspective” when you really mean “prospective” clients.
Denise thanks for your comment. LOL I suspect this isn’t the only typo on the site but I do try catch them before hitting publish.