Preparing for retirement is an exciting yet nerve-racking time. It takes years of preparation, planning, and execution to pull it off. But before putting in your two-week notice, there are three numbers that you need to know.

#1  Monthly Income

First, and foremost, you should be familiar with your monthly income during retirement. For most Americans, this includes Social Security benefits. The window to begin claiming benefits on your earning record starts at age 62 and caps out at age 70. The longer you wait, the larger your benefit will be, so timing is important. The amount on your Social Security statement is not always the amount deposited in your bank account. It could be lower for several reasons, including tax withholding (yes, Social Security is taxed), Medicare Part B premiums, and any Medicare premium adjustment amount based on your income. Talk with your financial advisor or a representative at your local Social Security office to determine your net monthly payment.

While it is true that pensions have decreased in popularity, that doesn’t completely rule them out of existence. We see them often when working with employees of public companies and schools. Similar to Social Security, what you see is not always what you get. Pensioners have several choices to make before beginning benefits, such as electing a guaranteed payout and taking reduced benefits in exchange for survivorship rights. Both decisions impact the monthly payment.

#2  Expenses

The bills don’t magically disappear when you retire, but they do change. Perhaps one of the most dramatic changes, both mentally and mathematically, is that you no longer have to save for retirement. You’ve made it!  Bedel Financial has helped countless clients across the finish line to retirement, and we often hear how it can be difficult to pivot from a savings mindset to a withdrawal mindset. But look on the bright side; that’s one less cash outflow to worry about during retirement!

It is easy to hone in on regular, monthly expenses such as your mortgage payment or grocery allotment; however, travel expenses tend to be seasonal. Be sure to include travel plans in your annual budget if you intend to do some globetrotting. It’s common for retirees to frontload travel plans in the initial retirement years and decrease the budget as they grow older and travel less. 

Another expense that’s likely to change is healthcare. One reason is that most Americans are eligible for Medicare at age 65. Medicare Parts A and B are standard, but you can purchase additional, optional coverage through Parts C, D and supplemental coverage. Premiums vary. For example, Part A comes at no cost (assuming you’ve accumulated enough credits) and Part B is deducted from your Social Security benefits. Part C (or supplemental coverage) is paid out-of-pocket, and Part D can be either paid out-of-pocket or deducted from Social Security benefits.

#3  Safe Portfolio Withdrawal Amount

Once you’ve defined income and expenses, subtract the two to find out whether you are cash flow positive or if you’re running a deficit. For learning purposes, let’s assume your expenses exceed income. The next step is to determine whether your portfolio can sustainably fund the deficit. One common rule of thumb in the retirement planning world is the 4% rule, which suggests retirees should stick to withdrawing 4% of their portfolio in the first year of retirement. In subsequent years, the initial withdrawal amount is adjusted for inflation. While this rule has many challenges and nuances, it is widely adopted as a safe withdrawal strategy.

A critical assumption of the 4% rule is asset allocation. Typically, investors start with an aggressive portfolio and phase into a more conservative portfolio as they near retirement. The 4% rule assumes a 50% stock, 50% bond allocation at retirement. However, this allocation is not suitable for everyone. Investing is highly personal and takes into account your financial plan, risk tolerance, and longevity. The makeup of your investments will always be important, but there is no greater time to make sure your portfolio aligns with your needs than retirement. After all, no one wants to retire twice!

Conclusion

Retirement isn’t a guessing game. It’s a numbers game. Know your numbers and turn in your retirement notice with confidence. If you don’t feel comfortable running the numbers yourself, hire a financial planner to do the work for you.

Kate Arndt, CFP is a Financial Planner with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Kate at karndt@bedelfinancial.com.