When working through a client’s financial plan, the most common question I receive is how much money is enough money. This question is on everyone’s mind for a few reasons. One, we do not want to run out of money. Two, we have goals in retirement, and we want to have enough cash to achieve them. Three, once we hit that golden number, we believe we can finally retire, no matter what age we are.
The problem people have in coming to a great answer is that retirement expenses are projections. What that means is often we are guessing at what things will cost years down the road.
Because of this projection, coming to a confident number is often confusing and overwhelming. Thankfully, there are 6 steps you can take to be sure your retirement will be financially secure.

Step One: Set Goals
The first step is to figure out what you want to do in retirement. It is hard to plan for something if you have no idea what you want to do.
This step is easily completed by sitting down and writing out what goals you have in retirement. Some examples may include: traveling, having a second home, spending time with family, be debt free, work part-time, and volunteer.
Understanding what goals are priorities, will help you understand what financial amount you need to have.

Step Two: Understand your Current Monthly Expenses
One of the biggest pitfalls people make in retirement planning is not knowing what they currently spend. This is so important because if you understand what you are spending now, you can easily figure out your retirement expenses. Here is a quick example of how this works.
Using a budget of your choice, see what your expenses are over a 2 or 3 month timeframe. Then, take the average and multiply that number by 12.
So, if in December you spend $4,200 and in January you spend $3,800 the average is $4,000. Then you simply multiply $4,000 times 12 and get $48,000. That is your annual expenses.
Now, let’s say your yearly expenses are $48,000. For many people this number will go down in retirement due to two factors: not saving for retirement anymore and no more mortgage. However, since healthcare costs will rise in retirement, I usually like to keep the same number.

Step Three: Consider Inflation
Inflation is one of the most misunderstood financial concepts and many do not take the steps to combat its effects.
Even though inflation has occasionally spiked throughout history, the average rate of inflation from 1913 to now is 3.1%. When deciding on a comfortable retirement number, remember that $48,000 in expenses today will not be $48,000 in 20 years. Using a simple inflation calculator, your $48,000 even in one year will then be $49,488 after inflation.
Do not simply assume you will need $48,000 each year for the rest of your life.

Step Four: Have 10x your Take Home or use the 4% Rule
In order to get a good baseline number that works for you, financial planners encourage the 10x and 4% rules.
The 10 times rule is simply multiplying your take home by 10 for a basic starting point. So, if your take home is 50,000 then your number should be 500,000.
A second way to get a ballpark estimate on how much you need in retirement is the 4% rule. This rule is where you withdraw 4% of your retirement each month. If that number covers your current monthly expenses then you are off to a great start.

Step Five: Pay off all Debts, Including your Mortgage
Common debts include credit cards, auto loans, and mortgages. Having these paid off will not only save you money because you aren’t paying interest, but it will lower your expenses.
Imagine having the money you are currently paying on any debt and allocating that to some of your goals.

Step Six: Invest
This final step is something you should be doing all along. Some people, however, wrongly assume that when they retire they do not need to continue to invest.
The ability to retire and stay retired is fueled by investing. All the money that you have grown over the years is multiplying in retirement due to compound interest. Continuing to allow that to grow in a smart portfolio is essential so a successful retirement.