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

$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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