# Three Steps to Determine if You Have Enough to Retire

I’ve posted a ton on retirement including: how to retire early,  whether \$1 million is too little to retire or not, and how \$3 million is not enough to retire.

But those posts tend to be “how to’s” with general suggestions.

Today I’d like to get more specific and provide a roadmap for those wondering if they can retire or not — a way for them to calculate their numbers and see where they stand.

So with that, let’s begin detailing the three steps to determining if you have enough to retire.

#### Step 1: Estimate your retirement expenses.

This step sets the baseline for what you’ll have to overcome to retire.

If you’ve had a budget throughout the years and/or tracked your spending in any way, estimating your retirement expenses will be easy. You probably already have a good sense of what things cost and may have years of exact spending data to use in setting retirement costs.

We have over 20 years of spending saved in Quicken, so this was a breeze for us.

If you don’t have any historical results, you’ll need to get some (eventually). Set up a system (like Quicken, Mint, etc.) to track spending and get some actual data. Until then, you can estimate by looking at past checkbook, bank, and credit card statements.

Simply list what you plan to spend by category (food, clothing, home, entertainment, etc.) over the first three years of retirement (beyond three years is difficult to estimate). You can do this by year, quarter, or month and use whatever format works for you (paper, spreadsheet, computer program, etc.)

We use a spreadsheet and list costs by category and by month. Then at the end of each month, I save a new copy of the previous month’s sheet, lop off the month that has passed, and set new projections based on more current info. This gives me a completely up-to-date budget every month and allows me to make adjustments where needed. Easy-peasy.

Doing this, you’ll get an annual spending number. This will be your retirement target.

#### Step 2: Determine how much retirement income you can generate.

Calculating retirement income can be difficult since there are so many variables that go into it. I’ll focus on the basics that likely apply to most people. These are:

• Total assets (less any debt on them). Obviously, the higher this number, the better.
• The amount of income these assets can generate (or said another way, the income generating return rate on these assets)
• Whether or not you want to draw down your assets in retirement (for example, using the 4% rule we’ve discussed here quite a bit — see How to Retire on \$1 Million or Less if you want more specifics)
• Extra income from a side hustle.

Once you know these, you can get a decent projection of retirement income. I’ll run through a few examples to show what I mean.

High Income-Generating Assets

Let’s begin with Bob and Sally who have the following finances:

• \$2 million in assets — half in real estate and half in index funds
• The real estate earns 8% in income per year while the index funds earn 1.5% in dividends

Here’s what Bob and Sally could earn in retirement:

• If they didn’t want to draw down their assets, they would earn \$95,000 per year (8% on the \$1 million in real estate and 1.5% on the \$1 million in index funds)
• If they did want to draw down their assets, they would earn \$120,000 per year (8% on the \$1 million in real estate and 4% withdrawal on \$1 million in index funds)

Not bad, right? They have a good amount of assets and a good return rate (especially on the real estate) which allows them a healthy retirement income.

Lower Assets and Lower Returns

Now let’s look at Ben and Sue’s financial set up:

• \$1.5 million in assets, all in index funds
• The index funds earn 1.5% in dividends

Here’s what Ben and Sue could earn in retirement:

• If they didn’t want to draw down their assets, they would earn \$22,500 per year (1.5% on \$1.5 million in index funds)
• If they did want to draw down their assets, they would earn \$60,000 per year (4% withdrawal on \$1.5 million in index funds)

Their assets are lower and they don’t have any that generate high return rates, so their income is much lower than in the first example.

Low Assets and Low Returns

Now let’s look at what Bert and Sara have available:

• \$750,000 in assets, all in index funds
• The index funds earn 1.5% in dividends

Here’s what Bert and Sara could earn in retirement:

• If they didn’t want to draw down their assets, they would earn \$11,250 per year (1.5% on \$750k in index funds)
• If they did want to draw down their assets, they would earn \$30,000 per year (4% withdrawal on \$750k in index funds)

Fewer assets and lower returns equal lower retirement income.

Low Assets, Low Returns, and a Side Hustle

Now let’s see how things change is you add in a side hustle.

Same example as above — Bert and Sara have available:

• \$750,000 in assets, all in index funds
• The index funds earn 1.5% in dividends

Only this time they also have a side hustle that earns them \$20,000 per year.

Here’s what Bert and Sara could earn in retirement:

• If they didn’t want to draw down their assets, they would earn \$31,250 per year (1.5% on \$750k in index funds plus the side hustle of \$20k)
• If they did want to draw down their assets, they would earn \$50,000 per year (4% withdrawal on \$750k in index funds plus the side hustle of \$20k)

Big difference from their non-side hustle results, huh?

This is why having a side hustle can make such a huge difference in retiring both faster as well as with more retirement income.

I think you get the idea. There are a myriad of different outcomes based on various levels of assets and what those assets could earn. This is why you need to use your own numbers to calculate your specific returns.

Once you do calculate your numbers, you’ll then want to add in any other income (like from pensions, annuities, post-retirement work, businesses, part-time work, etc.) to get your total retirement income.

#### Step 3: Compare income to expenses.

Now compare the numbers from the first two steps.

If income is greater than expenses, you are ready to retire. Of course, you want to leave yourself some margin of safety so the wider the spread, the better.

If the expenses are greater, you still have some work to do. Options include: