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Posted: April 01, 2011

When can I retire? Part 1

Follow these steps

Wayne Farlow

A question that I often hear is "when I can retire?" While a complete and thorough answer to this question requires professional retirement planning, the following is a simplified, easy to perform approach that can provide a "ballpark" answer to this important question.

Here is how it works.

Step 1: Separate expenses into either essential or discretionary expenses. Essential expenses include food, clothing, housing, property and casualty insurance, taxes and medical expenses. Essential expenses should also include all "required" expenses, including telephones, cable, internet, pet care, hair care, etc. All other expenses, including expenses (such as travel) that you would like to increase in retirement, are classified as discretionary expenses.

Step 2: Identify available lifetime income streams. This annual income will include pensions and Social Security, as well as any lifetime annuity or trust income. If the income stream is not inflation adjusted, use only 2/3 of the annual amount to adjust for future inflation.

Step 3: Subtract the amount in Step 2 from annual essential expenses. The difference calculated provides the "essential income gap."

Step 4: Identify annual income expected from sources other than lifetime income streams. This would include income expected from taxable and tax deferred investment accounts, income from rental properties, post retirement employment income and all other income sources available during retirement.

Step 5: Subtract the amount in Step 4 from annual discretionary expenses. The difference calculated provides the "discretionary income gap."

Step 6: Add the values found in Step 3 and Step 5 to determine your "Total Income Gap." If the sum is negative, you should have adequate resources to retire and meet your income requirements. Most people will find that this number is positive.

Step 7: Sum all of your investible retirement assets including taxable accounts, tax deferred accounts, Roth accounts and the net sales value of any properties or other assets that might be sold during retirement. If you included income from rental properties in Step 4, do not include those properties in Step 7.

Step 8: Divide the amount calculated in Step 7 by the Total Income Gap (Step 6) to determine the number of years that investment resources may last after retirement.

Step 9: Add your planned retirement age to the number found in Step 8. If this sum is over 90, retirement in the planned year may be possible

Let's look at an example of how this would work:

Mr. and Mrs. Smith are both age 60 and plan on retiring at their full Social Security retirement age (FRA) of 66. After examining their current expenses, they have determined that their "essential expenses" are $50,000 per year and their "discretionary expenses" are $30,000 per year. The discretionary amount includes an additional $10K per year that they wish to spend on travel after they retire. Total retirement expenses are $80,000 per year.

Based on current Social Security statements, the Smith's combined monthly Social Security income at age 66 will be $3,225 or $38,700 annually. Mr. Smith will receive a non inflation adjusted $500/mo pension from a previous employer. The annual "inflation adjusted" pension amount is 12*$500*2/3 = $4,000. Thus, their total lifetime income is $42,700. Subtracting this amount from the essential expenses of $50,000 leaves a $7,300 "essential income gap."

The Smiths have approximately $600,000 in taxable and tax deferred retirement accounts, yielding 2.5 percent annually. These investments provide an annual income of $15,000. Since their discretionary expenses are $30,000, their "discretionary income gap" is $15,000. The Smiths "Total Income Gap" is therefore $22,300.

By dividing $600,000 by $22,300, the Smiths find that their savings should last 26.9 years after they retire at age 66. By adding 26.9 to 66 they find that their funds could last until they are almost 93, suggesting that their current savings will likely be sufficient.

While this is a rudimentary approach to determining retirement preparedness, it is an easy method to estimate one's ability to retire at a given age.

In Part 2, we will consider approaches to help close the income gaps and reduce one's retirement age.
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Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor, providing fee-only financial planning, asset management and retirement planning services. He is the author of "Financial Abundance Guide," available free at . He can be reached by email at or at 303-554-0309.


Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor firm.  He is a Certified Financial Planner (CFP®), focusing on Retirement Planning, Investment Management, Small Business Owner Planning and Sudden Wealth/Inheritance Planning.  His book, “Financial Abundance Guide,” is available free at .  He can be reached at or at 303-554-0309.

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