Bridget Sullivan Mermel CFP(R) CPA
How to Figure Out Retirement: Knowing How Much You Need to Retire
You can figure out retirement, but it generally takes a bit of time. Knowing how much you need to retire and feeling ready to do it are two different things. It's great if you can take time to let all the realities of it sink in.
In this episode, we talk through the transition from financial independence to retirement. You'll find out how much you need as well as how to focus your attention.
You want to think through your income--social security, pension, and any other income you'll have. Plus you'll want to focus on your expenses.
Note, that doesn't mean you have to cut back! But knowing what your income is and how much you spend is generally key to a happy, successful retirement.
We talk through the general financial benchmarks and the mental transitions that come along at this point. It also might be the time to think about hiring a financial planner or advisor.
Figuring out when to retire is an important decision and you generally only make it once. Plus, financial advisors can pay for themselves easier at this point than, perhaps, they've been able to before. In other words, it can be worth the money.
This can sound self-serving, but we if you watch our other videos you know, we don't tell people to run out and get an advisor all the time!
But during this transition, a financial planner can be worth it.
Here's Bridget's firm website: https://www.sullivanmermel.com
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
Thanks for watching and please subscribe!
Bridget: How much money do you need to consider yourself financially independent? That's our topic today on Friends Talk Financial Planning. I'm Bridget Sullivan Mermel, and I have a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin. Before digging into this question—I’m really excited to talk about it—I want to remind everybody to hit the subscribe button. You can help raise our profile, help other people find us, and help the channel. So please hit subscribe.
And once that's done, let's talk about retirement. How do you know how much money you have? How do you know if you’re financially independent? I want to hear what you have to say about this, Bridget. But first off, I just want to bring up that what we're trying to do is not tell you, “Hey, if you have this much money, you can retire.”
This episode is more about, “Hey, I'm thinking about retirement in the next few years. Am I on track?” It gets a little more specific, but it’s more about, “How do I know if I’m ready to retire or if it's time to get some financial help?” So, what do you talk about when you talk with your friends or clients? How much do I need to retire?
Bridget: Well, a lot of people don't just retire. I'm thinking about the spot where maybe you're working less and you know you're going to be okay, but maybe you haven't gotten to full retirement yet. That's what I consider financially independent. And I consider retirement financially independent as well. To get to this phase, however, you want to have seven times your annual income in your net worth, which we talked about in a previous episode.
And then we're going to pivot and start looking at your expenses—your annual expenses—and your investment portfolio. This is going to be different than what we were talking before about with net worth. We're getting more specific to say, “Okay, what do you have in your investment portfolio and how much you need to live?” And those are the things that we're going to compare at this stage in your life. And the benchmark we want here is to have seven to ten times of your annual living expenses in your portfolio.
John: Yeah. Portfolio—investment portfolio. Seven to ten times expenses.
John: And I think this is really an interesting topic, and that's exactly what we tell our clients, too. And as we talked about in previous episodes, at first, we talk about net worth. How does your net worth compare to your income? I guess one thing that I think is useful to talk about is why are we making a transition now from net worth and income to investment portfolio and expenses?
And I think that one of the reasons is that net worth is really important for building the whole picture, but you can't spend all of your net worth—real estate, other things. Paying out debt is important, but you can't spend those things. And as we get into financial independence, cash flow becomes really important, and thus portfolio is the focus. So that's one of the differentiators for me.
John: And then the other thing is it's easy to see net worth versus income. I can look at my tax return and my W-2. Here's how much I make. And now, as you said, we're still talking about generalities, but it's more specific than it used to be in that knowing my living expenses can be more difficult. I can't look at my tax return or my pay stub and find out my living expenses. But that's what the cash flow needs to cover. So we're starting to narrow that funnel down a little bit. Is that how you think about it?
Bridget: Absolutely. The other thing is that your cash flow and your living expenses are going to be major predictors of your financial ability in retirement. And so, getting a handle on those now at this stage is really important. But also, sometimes there's people who don't meet the standard with net worth and annual income because maybe they're 49 and all of a sudden, they double their income.
Bridget: So they haven't had a chance to catch up, but they haven't doubled their expenses at all. Their expenses might be low. There're plenty of people that we end up working with whose expenses are low. So it doesn't take as much annual income as we talked about in the previous stage. So once you're in the stage of trying to judge, “Am I financially independent?” it matters how much you spend. It doesn't really matter how much you make. Really, how much you spend is what's important.
John: And it's the idea of benchmarks. It's not an exact science, but it's more like, “Hey, are we directionally accurate? Are we on track with things?” We talked previously about driving in the right general direction. Now we're starting to get to the point where we kind of need to know where the highways are, and then we're going to need to know exactly what roads we need to get to where we're trying to go. And this is the place, I think, where folks might look to hire a financial planner.
From the financial planning standpoint, when you’re driving south, you don't need a ton of guidance. But now as it starts to get narrower, it becomes more complicated. And frankly, more important. When you start thinking about what would make your money last for the next 30 years without earning an income, the stakes are higher. That sort of recommendation might be self-serving. That's how we get more clients. But this is the place where it can make some sense to find an advisor, because it is more complicated.
Bridget: There’re emotional parts of it that you're talking about, like the importance of making decision, etc. But then there's also a lot of times at this stage when the financial planner can actually pay for themselves a lot easier than they would in earlier stages because there's more money to work with. And so that's what I find, too, is that a lot of times the financial independence and the retirement transition, people want some professional help to work through it, emotionally, technically, and intellectually. And they want to understand the numbers, too.
John: Retirement is one of the biggest transitions people make in their lifetime. And they do it once. How many times have you done something once and done it get exactly the best way you could do it?
I wanted to circle back on something you brought up earlier, Bridget—the idea of working part time and the sort of transitioning. I think it's a really great point. As I think about seven to ten times income, the younger you are, if you're 55, 57, 53, and you're going to step back and maybe retire, maybe work less, well, then you need to be closer on the top end of that number, right?
John: I want to see your investments at ten times, twelve times your annual expenses. If I'm older than that, I'm already 65 and I'm going to be able to start to go on Medicare in a few years and claim Social Security, I probably need to have a little less. Seven or eight times you're spending is probably good if you're on the lower end.
So it's this sort of continuum of things. It's not “Oh, I get to this amount, I can do this,” but hopefully it helps give you some sense for “Oh, you know what? Yeah, I guess I'm on track, and it takes some time to kind of get used to that. Yeah, I guess I could retire. I'm on the right track. I still like work. I'm 58, I'm 62. I love what I do, but I just want to know that I could step back.” This is a great guideline for that.
Bridget: Exactly. And the other thing that I'd like to mention is that it's a great time of your life to make sure that you have a grip on what your expenses are. That's not to say cut them down, but it’s good to have some way of knowing what your expenses are, because that'll be key in your retirement decision. Knowing how much you spend a year, or a month helps a lot. And maybe how much you aspire to spend when you're retired. That would be helpful, too. Yeah.
John: That's great. For me and a lot of the folks we work with, it takes some time. It's not like you can just go down and immediately calculate expenses. It takes a couple of years. Just being mindful is key. Thinking to yourself, “I’d like to spend a little more than that. I don't need to spend that much,” or just that thought process is really useful.
Bridget: Yeah. I'm not advocating for changing your spending at all. I'm just advocating for knowing how much you spend and tracking it. And then if you want to change it for different reasons, that’s fine, but I'm just saying that it's important for the planning to know how much you want to spend.
John: That's great. I think it's a great way to sort of circle back. Know how much you're spending or start to think about what your expenses are. And when your investment portfolio is seven to ten times your living expenses, that's when you know you're in a position where you're going to be able to retire, maybe in the very near future, maybe in the slightly more distant future, but you're on the right track. That's a good benchmark for knowing when you’re going to be financially independent.
Bridget: Great. And with that, I'm Bridget Sullivan Mermel, and this is John Scherer. We both have fee-only financial planning practices, and we're members of ACP or the Alliance of Comprehensive Planners. You can find out more about it at acplanners.org. It's a nationwide, not-for-profit group of planners that operate with the same principles as we do. If you like how we're talking about things, you can find a planner near you.
John: And don't forget to hit that subscribe button for Friends Talk Financial Planning. And with that, until next time.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.