Being a financial advisor means friends and family feel comfortable asking you their most personal money questions. A friend pulled me aside at coffee last week with a question we hear all the time: How do you know when you can actually afford to retire?

This friend is single and in her 60s. She works part-time and has some savings and investments but feels uncertain about the future. How does anyone plan for the coming years, she wondered, when end-of-life costs are impossible to guess? How do we know how much we’ll be spending, or even where we’ll be living?

This situation is one of the most common reasons people hire us as financial advisors; we can analyze your exact circumstances and model how different choices will impact your finances over time.

But for inquiring minds at the coffee shop, here’s how you can ballpark your readiness.

Retirement Readiness Quick(ish) Calculation:

Give it a try below. Keep reading on for the full breakdown of each step.

Retirement Readiness Calculator

A ballpark estimate based on your income, savings, and spending. Not a substitute for a financial plan.

Step 1

Estimated monthly spending

Include housing, utilities, groceries, insurance, dining, travel, and incidentals.

Step 2

Monthly Social Security benefit

Find your estimated benefit at ssa.gov. Enter 0 if not applicable.

Step 3

Other reliable monthly income

Pension, annuity, rental income, or part-time work. Use gross income before taxes.

Step 4

Total invested assets

Every dollar in IRAs, 401(k)s, 403(b)s, brokerage accounts. Exclude your emergency fund.

---

Calculate My Readiness

Investment income (4% rule / 12) —

Social Security —

Other income —

Total monthly income —

Estimated monthly spending —

Monthly surplus / shortfall —

This calculator uses a 4% annual withdrawal rate as a starting estimate. Your actual withdrawal rate may differ based on your timeline, tax situation, and plan. This is not financial advice.

Start over

1. Estimate your current monthly spending. Include fixed expenses like your rent/mortgage, utilities, insurance, and groceries, as well as incidentals like shopping, restaurants, and vacations. If you know your mortgage will be paid off or you anticipate specific changes, like increased healthcare or vacation spending, you should adjust your estimate.

2. Determine your Social Security benefit. Go to ssa.gov and look up your monthly benefit amount in the year you plan to retire or, if you know it, the year you will begin taking your benefit. (These years don’t need to be the same.) While there’s no universal best age to start taking your benefit, doing so later will translate into a larger monthly check.

3. Add other reliable income to determine your total monthly inflow. Think pension, annuity, rental income, or a part-time job. (Use your gross income before taxes or deductions.)

4. Add investment income:
   a. First, tally up your total invested assets. That means every dollar in an IRA, 401(k), 403(b), IAP, brokerage, or other investment or retirement account. Don’t include your emergency fund.
   b. Then, calculate your monthly withdrawals. Assume a withdrawal rate of 4%, a common starting place. Multiply your total invested assets by .04, then divide by 12. Example with $500,000 invested: $500,000 x 0.04 = $20,000. $20,000 / 12 = $1,666.67 monthly income from investments.

5. Determine your total income. Add together your Social Security benefit, other income, and investment income.

6. Calculate your potential shortfall. Subtract your total monthly spending from your total income. This amount is the shortfall you’ll need to cover your estimated expenses in retirement, hopefully with investment account withdrawals. Example: With a monthly spend of $5,000, a $1,200 monthly pension, and a Social Security benefit of $3,000, your total income is $4,200. Your shortfall is therefore $800, or $5,000 minus $4,200.

Nailing Down the Details

Ultimately, your retirement plan must consider what happens during a prolonged market decline, when to claim Social Security, healthcare costs, taxes, and many other factors.

The calculation above is a first step that can tell you whether retirement appears to be within reach and, perhaps more importantly, which questions deserve a closer look before you make the decision, such as:

• Will my mortgage be paid off before I retire?

• When should I take Social Security?

• What are my priorities for spending, saving, and gifting?

A financial advisor can hone your retirement spending projection, factor in major expenses like a home upgrade after retirement, and account for family medical history. We also help people understand what an appropriate withdrawal rate might be. (We’ve used 4% in the calculation above, but this percentage is only a general rule.)

Critically, an advisor can guide you through the foundational decision of when to take Social Security if you’re eligible. This decision impacts nearly every aspect of retirement planning.

What if I Don’t Have Enough?

Any amount you can save for retirement is helpful. Clients who reach their 80s with $40,000 saved have a cushion that can protect against unexpected expenses, and people with $100,000 may be able to pay for a year or more of assisted living. Mindset matters, too. People who throw up their hands in mid-life and don’t save for retirement because they run into a challenging health problem or unexpected layoff tend to be worse off than those who can recognize bad times are often temporary, and pick up saving what they can, when they can.

We work with a wide range of clients, from those who retire early to those who start thinking about retirement much later in life. Our commitment to meaningfully help people at all asset levels is one of the reasons that I work at Human Investing. Regardless of your financial circumstances, the same advice applies: Stay flexible in your mindset about money. Do what you can, forgive yourself for past missteps, and seize new opportunities as they arise.

---

Disclosure: Human Investing is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. This content is for informational and educational purposes only and does not constitute personalized investment advice or a recommendation. Past performance is not indicative of future results. All investments carry risk, including potential loss of principal. Readers should consult with a qualified professional regarding their specific financial situation.

---

Related Articles

As the golden years approach, retirement promises relaxation and newfound freedom. However, during this period of life, there's an often misjudged financial responsibility - Required Minimum Distributions (RMD). Despite an investor saving diligently to tax-deferred accounts like pre-tax 401(k)s or traditional IRAs for retirement tax advantages, higher tax rates often blindside retirees due to these distributions.

Failure to prepare for RMDs can lead to a substantial increase in your retirement tax bill.

Fortunately, strategic retirement planning and foresight offer avenues to mitigate the impact of an inflated tax bill. By reducing your taxes, you gain the flexibility to allocate your funds where they matter most – be it for personal expenses, supporting loved ones, or giving back to charitable causes.

Understanding RMDs

RMDs are mandatory withdrawals from tax-deferred retirement accounts starting at age 73 (or 75 for those born in 1960 or later). These withdrawals aim to ensure you pay taxes on the money you've saved.

Each year, individuals can calculate their RMD by dividing the total amount in their eligible retirement accounts at year-end by a factor determined by the IRS, derived from their life expectancy which is listed in the Uniform Lifetime Table.

Let’s use an individual who is age 73 and had a $1,000,000 IRA balance as of December 31 of the previous year as an example. Their IRS life expectancy factor is 26.5, which means that their RMD for this year will be $37,735.85.

$1,000,000 ÷ 26.5 = $37,735.85

It's crucial to take RMDs on time to avoid penalties. Failure to do so can result in a 25% excise tax on the amount not withdrawn as required.

Don’t Leave your RMDs Unchecked

As each year passes, the life expectancy factor used to calculate Required Minimum Distributions (RMDs) decreases. This results in a larger portion of the investment portfolio needed for mandated withdrawals. Put simply, the older you are, the higher the required withdrawal amount, which in turn increases the associated tax bill.

To illustrate this increase in RMDs over time, let’s consider that someone with a $1,000,000 IRA balance must take approximately $37,736 at age 73, or about 4% of their pretax eligible portfolio. Seventeen years later, at age 90, the required withdrawal amount grows to over $118,000, or about 8% of their qualified portfolio.

This is where the danger of RMDs becomes evident. Left unchecked, RMDs can snowball, leading to an increasingly burdensome annual and lifetime tax bill. Additionally, as your income rises due to RMDs, you may inadvertently trigger additional tax traps such as:

• Taxes on Social Security Benefits: An increase in income can subject a higher percentage of your Social Security benefit to taxes. Whether or not your Social Security benefits are taxed is based on your combined income level and marital status.

• Medicare IRMAA surcharges: These surcharges present another potential financial concern. This can increase monthly Medicare premiums due to the Income Related Monthly Adjustment Amount (IRMAA). If you're enrolled in Medicare or plan to enroll within the next two years, exceeding the income threshold by as little as $1 could result in hundreds of dollars in additional premiums for Medicare Part B and Part D.

Strategies to Mitigate Tax Impacts of RMDs

Although failure to plan for RMDs can cause tax traps, thoughtful strategizing can help. Here are a few ways to mitigate tax impacts of RMDs, so they support your retirement lifestyle rather than cause a headache:

Withdraw more funds than you need

The most straight-forward strategy is to withdraw more funds than you need after age 59½. This age typically marks the earliest point at which you can start withdrawing from a tax-deferred account without facing a 10% early withdrawal penalty. By deliberately withdrawing funds, you can reduce your account balance and, as a result, your future RMDs. This strategy can be advantageous when current tax rates are lower than anticipated future rates.

Utilize Roth Conversions

A Roth conversion involves transferring a portion of funds from a traditional IRA or other tax-deferred retirement account into a Roth IRA. During this process, taxes are paid on the transferred amount at ordinary income tax rates for the year of conversion. The remaining funds are then reinvested in the Roth account.

This strategy appeals to many, especially those aiming to strategically reduce future Required Minimum Distributions (RMDs). Withdrawals from Roth IRAs in retirement are tax-free, and there are no RMD requirements, making this option attractive for minimizing tax obligations.

The rationale behind opting for a partial Roth conversion revolves around managing when and at what rate taxes are paid. By strategically choosing to pay taxes on tax-deferred dollars in a year when you are in a lower tax bracket than when you anticipate withdrawing the funds, you can maximize tax benefits. Additionally, reinvesting dollars into a Roth IRA allows them to continue benefiting from compound growth, with all future growth being tax-free.

Effective Roth conversions should be based on a thorough analysis of both current and future tax brackets, considering potential changes in tax rates and various sources of retirement income. It's crucial to convert just enough to utilize the lower tax brackets, maximizing the advantages of Roth Conversion.

Consider this scenario: you possess a $1,000,000 IRA and have recently consulted with your financial planner for a retirement tax analysis. The analysis suggests that executing a $50,000 Roth Conversion to fill up the 12% tax bracket would be prudent. This strategic move takes advantage of the current lower tax rate, shielding you from potential future tax increases when Required Minimum Distributions (RMDs) come into play. Given the expectation that RMDs will push you into the 25% federal tax bracket in the future, this decision protects you from paying an additional 13% in taxes.

During this conversion process, the $50,000 seamlessly transitions from your traditional IRA to a Roth IRA. Although this amount is subject to ordinary income tax, you have flexibility in managing the tax liability, whether through tax withholding on the Roth Conversion or by utilizing estimated taxes from alternative sources.

It's important to note that any subsequent growth on the converted amount within the Roth IRA remains entirely tax-free for you or your beneficiaries, providing lasting financial benefits.

Make an Impact through Charitable Donations

Another strategy to decrease your tax burden involves donating some of your IRA distributions directly to a qualified charity. Once you reach age 70½, you become eligible to make a Qualified Charitable Distribution (QCD), which is a tax-free transfer of funds from your IRA to an IRS-recognized charity. While these distributions are not subject to taxation, they do count towards fulfilling your required minimum distributions for the year.

Retirees who do not immediately require their RMDs and wish to support their chosen charity or religious institution tax-efficiently should evaluate whether making donations directly from their IRA aligns with their financial goals.

Viewing QCDs as part of a broader tax and charitable strategy is essential. Donating directly from an IRA offers a more significant financial benefit than donating cash or appreciated securities because it reduces your Adjusted Gross Income (AGI). This is particularly advantageous for retirees who no longer itemize deductions and instead choose the standard deduction, maximizing the tax benefits of charitable giving.

Have an RMD Strategy in Place

Grasping the nuances of RMDs is pivotal for retirement preparedness. Neglecting to address RMDs can result in significant tax liabilities, jeopardizing your financial stability during retirement.

By integrating proactive strategies into your retirement planning, you can mitigate the effects of RMDs, maintain control over your tax situation, and align your retirement savings with your lifestyle and legacy goals. Seeking advice from financial experts can offer personalized support in navigating RMDs effectively, empowering you to pursue your retirement aspirations confidently.

For more on retirement strategies, download our 36-page guide here.

---

---

Related Articles

This article was originally published on Forbes.

Shutterstock

The Employee Retirement Income Security Act (ERISA) was established in 1974 to give employees retirement income security. Why, then, after 40-plus years, are Americans so underprepared for retirement?

According to a 2015 study from the Government Accountability Office, "About half of households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA)." Even those who have saved have saved poorly. Among those households of residents ages 55 to 64 with some retirement savings, the median amount saved is $104,000. For those 65 to 74, the amount is roughly $148,000 per household. And, with 70% of the civilian population having access to a retirement plan and 91% access for government employees, it’s a wonder there is such a lack of retirement readiness.

There is no shortage of financial and intellectual capital being spent on a solution for retirement readiness. But most solutions have fallen short of narrowing the gap between the retirement haves and have-nots. So, what is the solution? My thoughts follow:

Government Plus Employer Plus Employee

First, the government is already involved in the regulation of retirement plans, as well as allowing for employers to deduct the expenses of having a plan, so why not go all in? Why not tell employers, “If you are going to get the deduction, you need to meet certain requirements that are great for employees, great for your business and great for our country”?

Those requirements could include auto-enrollment (as this has been a home-run for participation), auto-increase (as individuals get raises, they add a little more to their retirement) and an eligible age-based default option (eligibility for a great default option would be low-cost and diversified as you get from the likes of popular mutual fund providers with their index retirement glide path funds).

In order to qualify for a business deduction or incentive from the government, an employer would be required to match a certain amount. I’d propose 5%, with the employee required to commit 5% to get that amount. Why these amounts? Because if someone has a job for 40 years and invests in a basket of mutual funds growing at or around 8%, with both the employee and employer contributing at 5% each, they end up a millionaire (assuming a $36,000 annual salary, or $300 per month contributions, compounded monthly for 40 years.)

The Industry

In a recent Society for Human Resource Management (SHRM) study, more than 70% of HR professionals surveyed emphasized the importance a retirement savings plan. So, at a minimum, employees are aware of the need to save and desire to do so. While there is definitely a need amongst employees to save for retirement, there are several barriers that impact participants interest and willingness to save. First, trust among advisors is low. Second, many plans have a dizzying array of options, which negatively impacts deferral rates. Finally, not all employers offer to match contributions, which minimizes the incentive for employees to contribute to the 401(k) versus less automated choices, like an IRA.

So, what can the industry do to partner with employers and their workforce? There are two things in my view:

1. Understand the heart of ERISA. Advisors and their firms are to put the interests of the employee and their income security at the center of everything they are doing. If, somehow, the advice we are giving in any way conflicts with the employee and their security, then we should reassess what we are doing and meet the stated purpose of ERISA -- it doesn’t need to be any more complex.

2. In order to minimize the potential for anything but the fiduciary standard, any firm operating in the retirement space should be required to be a fiduciary and have no ability to be dually registered or receive commissions, kickbacks, trips or any other super-secret benefit.

Join the small percentage of firms that are truly fee-only and have no way of receiving any form of compensation other than from the client. Disclosing away conflicts is not the answer for the clients, as few read the disclosures they are provided. If we are going to serve clients well, eliminating the ability for the conflict to exist is the only reasonable route to go.

In conclusion, the government is already involved in both rule-making and incentives for companies and their employees to offer and invest in retirement plans. A model for offering a retirement plan that meets certain criteria in order to fully receive the incentive should be outlined and adhered to by companies and their employees. In partnership with the government, employers and employees, the financial services community should be held to a higher standard to eliminate the conflicts that keep retirement plans for becoming all they could be, which is for employee retirement income security.

---

---

Related Articles