Can I Retire Yet? Answer Question with One Simple Wealth Formula

Have you ever faced a crucial financial decision, and felt anxious because you really didn’t want to take the wrong path?

For example, you may be sick and tired of your 9-5 job, hate your boss, or just feel totally done with the rate race, but pulling the trigger and quitting for good is, well, frankly terrifying.

You’ve spent your entire adult life working.

You’ve done your best to set aside money for retirement, despite all the emergencies (and if you’re like me, the occasional large purchases that are anything but emergencies…).

So, can you finally call it a career, and kick back and enjoy your “golden years?” How can you tell if what you have now is enough to retire on?

Can I (Author of this Article) Retire Yet?

I’ve been thinking about this one for a while now.

My first thought was if I retire now and it turns out it was too early, my future will hold another decision. A far less comfortable one… Do I cut expenses to the bone to stretch our dollars, or do I let us run out of money before we run out of lifetime (and become a burden on our kids or on society)?

Like I said, a bit terrifying.

Good thing I’m a numbers and finance guy, because that let me put together a relatively simple “wealth formula” to make the decision a lot simpler.

My answer?

Yes, if we’re willing to give up our dream home. For the retirement I want for us, I need to stick with it for another 4 years or so, depending on how the stock market behaves.

Good thing I enjoy doing what I do…

Below, I share my formula with you, explaining how I came up with it and how to use it.

As a bonus, I also list some options I’ve come up with in case the answer is still “No,” but life takes the decision out of my hands.

We Have to Help Our Future Self, but Life Keep Getting in the Way

If you’re like most of us in our 40s, 50s, or 60s, saving for retirement was somewhere in the back of your mind for at least a decade.

Problem was that there were always more urgent things you had to spend on…

• Rent or mortgage, property taxes, utilities, etc. – all together known as “housing”
• Buying a car, paying for auto insurance, maintenance, repairs, fuel, parking, tolls, etc. – all together known as “transportation”
• Food and other groceries
• Health insurance and medical expenses
• Etc. etc. etc…

Then there were all the things we didn’t have to do, but really wanted to (or needed for our sanity):

• Donations and contributions
• Dining out occasionally (or not so occasionally…)
• Movies, shows, concerts, etc. (at least pre-Covid)
• Vacations, or at least staycations
• Some nicer clothes and shoes
• Gifts (if we’re honest, sometimes we overdo those…)

All these are harder and harder to cover as inflation rears its ugly head, but incomes for most of us have been stagnant or worse for decades…

So, we tell ourselves that we don’t really have to retire, or that we can’t retire anyway, so might as well enjoy today and let tomorrow worry about itself…

Sound familiar?

According to dqydj.com, based on Federal Reserve data, median retirement savings (that’s what you have in your IRAs, 401(k)s, 403(b)s, Keoghs, Pensions, etc.) maxes out when people are in their latter 50s (like me), at a measly $15,000!

If you use the 4% rule, that would provide about $50/month in retirement!

Ouch! Don’t spend it all in one place…

If you include pretty much all other financial assets not intended for current spending, the numbers increase to… Wait for it… $32,550! That’s enough to cover just under $110 a month in retirement.

This means that half of American adults of any age have essentially nothing useful saved toward retirement.

If you look at the average numbers (which get skewed upward because the wealthiest among us have a lot of money!), those max out for retirement accounts at $223,500 – enough to generate a monthly $745, and for the more expansive definition, at $550,400 – enough to generate a monthly $1835 in retirement.

I don’t know about you, but that’s not enough to pay the average rent or mortgage where I live, let alone cover anything else.

Then there’s the unpleasant truth that many people who can’t afford to retire get forced to retire by layoffs, poor health, age discrimination, and other factors beyond our control.

Remember the saying, misattributed to Ben Franklin, “If you fail to plan, you’re planning to fail.”

When Can You Retire?

The first step in planning for your retirement is knowing where the goalpost lies.

To figure this out, I needed to collect the things that affect that goalpost.

The first and most obvious is how much we need (or want) to spend in retirement so it’s better than just waiting to die. This is your retirement budget, which I’ll denote as “B.” Make sure to include in this any loan payments (e.g., mortgage, auto loan, credit cards, etc.) you expect to have to cover in retirement, as well as estimated taxes on your retirement income. This last will depend on the sources of your retirement income and tax law where you live. If you have no idea how to put together such a budget, you can use a shortcut. Take your current income before any taxes or other deductions, and reduce that number by however much you’re setting aside for the future.

Next, depending on your specific situation, you may have some fixed income coming in during retirement. This could include Social Security benefits, pension income, annuity income, etc. Anything that doesn’t need to be generated by your portfolio. Let’s denote this fixed income all together as “F.” If you’re planning to retire early, this number may be $0 for you.

The final piece is just as critical – the annual return you expect from your portfolio. However, you must account for inflation, because if you don’t the buying power of that return will gradually decrease. Over a 20-30 year retirement, it could drop in half! We’ll denote this return as “R.”

With these three variables, we’re ready to develop our wealth formula.

Clearly, if your fixed income F covers your expenses B in full, you don’t need to save anything more for retirement. You could pull the trigger right now! On the other hand, if the difference between the two is greater than $0, you need at least some invested funds. If that difference doubles, so does the need. That means that rather than either of those two, B and F, our formula only looks at the difference between them: (B – F).

Next, that difference has to be less than or equal to what your portfolio (P) throws off after keeping enough to let your principal keep up with inflation.

In mathematical notation, that’s:

P * R ≥ (B – F)

To figure out how big P needs to be, we’ll do some grade-school algebra and divide each side by R (for the more mathematical minded of you, since R has to be positive, the direction of the inequality doesn’t change):

P ≥ (B – F)/R

As they say, the devil is in the details… Here, most of the details are hiding in the annual inflation-adjusted return, R. This will depend on how you invest your portfolio, and how high inflation runs. Since I at least don’t own a functional crystal ball, I turned to historic data about inflation-adjusted returns from stocks (S&P 500) and bonds (10-year T-bonds).

From 1928 to 2020, US stocks returned ~6.6% annually after adjusting for inflation, while bonds returned ~1.9% after inflation. If you invest your nest egg in a 50/50 portfolio, history says you can expect ~4.25% inflation-adjusted returns. Recent projections, however, indicate the coming decades may be less generous, so I use a 3.5% inflation-adjusted return in my own projections.

Running Some Examples

Say you need $75,000 to cover your expenses in retirement (B), your joint Social Security benefits are $30,000 a year, and you have no annuities or pensions, so your F is $30,000. Subtracting F from B, you need $45,000/year covered by your portfolio.

Dividing that $45,000 by 0.035 (3.5%), we find that if your portfolio, P, is close to $1.3 million you can retire right now:

P > ($75k – $30k)/0.035 = ~1,286,000

If you’re looking for more of a champagne retirement, spending $150,000 and have $40,000 in expected fixed income in retirement, your needed portfolio value rises to~$3.15 million:

P > ($150k – $40k)/0.035 = ~3,143,000

In general, if you want to double your retirement spending, the fraction you can count on from Social Security is smaller, so your portfolio needs more than double.

The lesson from all the above is that wealth isn’t just about net worth or even invested net worth. It’s about that number relative to whatever your spending is in excess of your fixed income. This is why if you have $1.3 million and need $45k/year above your fixed income, you’re wealthier than your friend who has $3 million, but needs $110k above her fixed income. In this scenario, you could retire right now, while she has to stick with the grind for long enough to set aside and invest another $150k.

Josip Dunat, Wealth Advisor, The Sturkie Wealth Management Group likes the idea of tailored goal posts, “Indeed, different clients have different goalposts. Some are happy with $5000 a month, while others ‘need’ $10,000. Having enough isn’t about being too conservative, but rather choosing a healthier way to live life. There’s also the envy factor… what are your friends doing that may impact your level of happiness? Finally, there’s the issue of diversifying the types of accounts where you keep your money. Planning early on to have non-qualified assets gives you more flexibility in retirement.”

But What If…

As the old joke goes, “If you want to make G-d laugh, tell Him your plans.”

Here are some options I’ve come up with (not necessarily all original, since I tend to read a lot about the subject…).

• If the market drops just as I want to retire, I’ll put off retiring by a year or two, until it comes back. Meanwhile, I’ll deploy the 30% cash I have on the sidelines, so by the time the market breaks even I’ll have a lot more than I had before the crash.
• Beyond my full-time consulting, I write about personal and small-business finance, which I expect to continue doing even after I retire. This brings in a few thousand dollars a year already, and that number keeps growing. In terms of the above formula, I could count this as part of my “F,” but only if I’m willing to count on having to always continue doing this work and being at least as successful at monetizing it as a I am now.
• Once I reach our desired portfolio size, I plan to cut my consulting hours to 50% for a few years, rather than going straight from 100% to 0%. This will let our portfolio continue growing, while the remaining 50% income (more than) covers our expenses. After that, maybe I’ll slow down to 25%. This path will let us transition gradually into retirement.
• I plan to have at least 2-3 years’ worth of expenses in cash, so I’m not forced to sell stocks at depressed prices.
• If there’s a longer bear market, I’ll trim our discretionary expenses (staycation instead of vacation, etc.) until the market goes back up.
• Retirement research indicates that people’s spending in retirement tends to drop by about 1% each year. If you want to count on this to let you retire earlier, you could change R from 3.5% to 4.5%.

Douglas Greenberg, President, Pacific Northwest Advisory agrees with the need for such contingency planning, “Retirement planning begins with understanding your financial needs, fixed income sources during retirement, and expected investment returns. It’s crucial to have contingency plans for possible changes in financial circumstances or market conditions, and strategies for increasing income and savings if you’re not yet ready to retire​1​. Ultimately, successful retirement planning requires financial discipline, adaptability, and ongoing efforts to meet your retirement goals.”

However, not everyone agrees with my approach. For example, Dana J. Menard, CFP®, RLP®, CEPA®, CDAA™, Founder and Lead Financial Planner, Twin Cities Wealth Strategies, Inc. takes a far more conservative path, “There are many ‘rules of thumb’ and ‘equations’ that others tout, but at the end of the day, there are far too many variables that can make or break one’s retirement. The way I help my clients not get overwhelmed by all the what-ifs is to use an even simpler formula and then run 1000 Monte Carlo simulations and look at the best, worst, and average scenarios to visualize how life doesn’t happen in averages or straight lines. My formula is (Current Net Worth)/(Annual Expenses). This conservative estimate gives you a prudent idea of how many years you should be able to live off your assets, assuming no growth, knowing that there are many variables at play but not to expect a static growth rate, inflation rate, tax rates, or even account for health issues. All that matters is that you pick one formula and rerun it on an annual basis to allow for life’s curveballs!”

The Bottom Line

Use the simple formula above, entering your personal numbers. That will let you figure out how much you need to be able to retire. If you don’t have enough yet, you’re far from alone.

In that case, there are plenty of online articles you can read about how to make yourself more valuable at work so you get raises, start a side hustle, expand a side hustle into a full-time business, cut expenses (or at least dedicate 50% or more of any increase in your income toward retirement savings), etc.

If you make it a priority, you’ll do whatever is needed to get there. It won’t necessarily be easy, but with enough grit and a bit of luck, you can do it.

Are you ready to enjoy life more with less money stress?

Sign up to receive weekly insights from Wealthtender with useful money tips and fresh ideas to help you achieve your financial goals.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.