Do I have enough money to retire? That is a question that 77 million baby boomers are asking themselves. Many do not retire simply because they don't know the answer. And they are right to be fearful. Studies have shown that, based on their current savings, 60% of Americans will not be able to sustain their present lifestyle in retirement!



The most common advice you will hear from the financial community is that you will need 80% of your pre-retirement annual salary. Frankly, that is poor advice, and I think you will agree once you have read this article.

No one can answer this question for you, not even your financial advisor, because the answer involves more than just money. The process for finding the answer is simple, but doing the work to get the answer is more difficult. Knowing HOW to do it is the first step.

Basically, you need to answer four questions: (1) What kind of Life Do I Want, (2) What Will It Cost, (3) Where Will the Money Come From, and (3) How Much Will I need?

What Kind of Life Do I Want in Retirement?

The first question you need to ask yourself is "what do I want my life to be like in retirement?" But before you answer your financial advisor's questions about where you will be living, who will you be with, will you be traveling, etc., answer this question first: "What kind of life will make me happy, satisfied and fulfilled?"

To find the answer, look to your past. Think about what you were doing when you were in what is called a state of "flow," when you were functioning at a very high level, using all your talents, and so involved that you lost all sense of time. Where were you? What were you doing? Who were you with? What was the environment? What were the circumstances?

By deconstructing these memories, you will be able to learn a lot about yourself and what psychologists call your "motivational needs." By thinking of your "flow" experiences, you are analyzing your personality in the context of doing something which has a purpose, and we all need purpose in our lives, particularly in retirement.

Many people think they were happiest when they were on vacation, say those recent two weeks in Florida or that trip to Hawaii. I call this the "Carnival Cruise" retirement myth, because vacations are great only because they are a counterbalance to a set routine. Treating your life like a perpetual vacation is not going to keep you happy in the long term. Doing what you love will. So you first need to think about your retirement life in this context and then think about how to pay for it. Not the other way around.

What Will My Retirement Cost?

Now you are ready to do some projections of the costs of your retirement. Begin by analyzing where you are currently spending your money, pre-retirement, on a monthly and annual basis. Look at your checkbooks, your credit card statements, and how much cash you withdraw from the ATM each month. Put these in the appropriate categories (housing/property maintenance expenses, food, health care, personal living expenses, unreimbursed professional expenses, travel and entertainment, etc.).

Now, given the life you want to lead in retirement, look at these numbers again and anticipate how they are going to change. Your commuting costs and professional expenses may go down, but your travel and entertainment expenses will probably increase, and don't forget that health care expenses tend to increase as you get older, so take this into account based on the type of coverage and deductibles you have. Also travel is more expensive these days, particularly foreign travel due to the weak dollar.

Don't forget to estimate your tax liabilities, including taxes owed on any withdrawals from tax-sheltered accounts. As a result of this analysis, you will be able to determine the projected annual income you will need to support your "new life" in retirement.

Where Will the Money Come From?

Your next step is to determine where your retirement paycheck will come from. Traditional sources are a pension from your work (if any), social security, any part-time work you plan to do, and your savings (both tax-sheltered, including your 401k, IRAs, SEPs, etc. and after-tax savings and investments). Don't include home equity unless you plan on selling your home and downsizing, thereby releasing money for your personal use.

From your previous analysis, you have projected how much annual income you will need. Now add up the recurring payments from pensions, social security, and any others (i.e. investment property you plan to keep in retirement which has a positive cash flow). To this figure add a 4% withdrawal from your total combined tax-sheltered and after tax savings. It has been proven that a 4% annual withdrawal rate, adjusted annually for inflation, will insure that your money will last for the rest of your life.

How Much (More) Will I Need?

So what if it all isn't adding up? Now you can see if there is a "gap" between what you have and what you project you will need. How can you fill that gap?

Let's take a simple example. Let's say you find you need an additional $1500/month, or $18,000 a year. Divide $18,000 by .04 which equals $450,000. That is how much you will need to add to your savings to generate the additional income you require.

But what if that is not realistic? Then you need to go back to your "new life" expenditure calculations and make some adjustments. Remember what you learned about yourself from your "flow" memories and use this information to prioritize what is really important to you. Reduce or eliminate other less important things.

Perhaps you still want to travel, but you might consider reducing the number of trips. Continuing to work for a few more years, or working part-time in early retirement can make an enormous difference in sustaining a higher lifestyle. Research has shown that working 30% in the first five years of retirement will result in a portfolio 40% larger than it would otherwise have been at the end of that period, and this larger portfolio will sustain a higher lifestyle afterwards since there will be more money covering fewer years.

The financial advice I have given you is very conservative, and will ensure that you never go broke in your retirement, providing you continue to spend within the annual budget you have established for yourself to support the life you want to lead. There are circumstances where you could exceed 4% (if you have a shorter life expectancy due to some illness, if you anticipate a significant inheritance in the future, etc.) but 4% is a very safe number.

Better safe than sorry. And better happy, satisfied, fulfilled and enjoying every day of a purpose-driven retirement than sad, depressed, wandering aimlessly through an eternal "vacation" and worried that you will run out of money before you run out of life.