What’s Your Retirement Number?

At some point, everyone needs to understand how much money they'll need to achieve their retirement goals. In this episode of Capital Conversations, CERTIFIED FINANCIAL PLANNER™ Professional Colin Day and Portfolio Manager Ryan Potts discuss a simple yet effective tool we’ve created to help you determine if you're on the right track toward your retirement goals. Whether you're just starting out in your career or are nearing retirement, this episode is for you.

If you’d like to use our retirement tool, email Colin at colin@correctcap.com for a free copy.

For recent investment news and our take on the current market, retirement planning, and investment, listen to our podcast Capital Conversations or view our recent blog posts.

Below is a transcript of our most recent podcast, “What's Your Retirement Number?”

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Colin Day: Welcome back, everyone, to another Capital Conversation. I'm Colin Day, CERTIFIED FINANCIAL PLANNER™ Professional. With me is our Portfolio Manager, Ryan Potts.

Ryan, welcome back to the show.

Ryan Potts: Thank you, Colin. It's always a pleasure.

Colin Day: We've got a super visually-oriented podcast today. So my apologies for those of you that are listening to this. It will inspire you to maybe shoot me a note after this, though. So don't go anywhere, we still want you around.

If you are catching us on the visual version of our podcast on YouTube – we do post all these in case you're used to listening to us only in the audio format, come see us on YouTube.

What we are going to talk about today is a calculator, Ryan. A calculator that I put together, inspired by a webinar that actually also just got posted to our YouTube page.

You already caught that one, right?

Ryan Potts: Of course, yeah.

Colin Day: Yeah, ok. He didn’t.

So, the calculator that we are talking about, I have affectionately named, “What's Your Retirement Number?” It's not incredibly inspiring, or incredibly interesting, or, if you know what we're talking about, thought provoking for some. But the whole reason I did this is because for some people, you don't need a financial plan.

Ryan Potts: Whoa.

Colin Day: I know, right? It's completely antithetical to what we do as a profession.

But for some people, we just need to know that you're going in the right direction. We don't need to go into incredibly complicated lengths of understanding your situation. For those folks that maybe are of the younger generations, they're just wondering, “Am I on the trajectory to be able to retire based on a particular age?”

Here's a tool that I created in about a half hour that I think can help. Now, you've looked at it, and of course you do this professionally as well. General thoughts? What were your thoughts when you were looking at it? What [were] your first takeaways when you were looking through it?

Ryan Potts: Well, for 30 minutes I thought you did a great job. First and foremost.

The second thing was like, how many times have I been asked, “Hey Ryan, what's my number?” And I'm like, “Well, the process that we go through is very intricate and kind of thorough and in depth. And to answer that question, it might take a week's worth of work to figure that out.”

So I thought this tool was the catch all; kind of the starting point to maybe answer someone who is closer to my age, that's asking me that question. This would be a great resource for them to go into and figure out relatively what is their number?

But looking through it, you've got it segmented in different areas and it looks eerily familiar to what we do on the financial planning side with our tools, just obviously not that intense.

I would just like to walk through all the inputs that you have here. Maybe discussing some of the inputs that are available on here. And then ultimately I want to hear some kind of reasoning why those inputs were there.

Colin Day: Absolutely. We can absolutely do that. Because again, this tool – for those of you that haven't been able to see it yet – this is just on a Google Sheet – Excel for the Google ecosystem. So it's designed to be very simple, fillable cells. You put in your information and within less than five minutes, you should have a pretty good answer for you.

So you want to start with current income?

Ryan Potts: Well, before I do that, I do want to ask, just for those who are listening and don't know what we're referencing in terms of “What's your number?” Could you explain to the audience quickly, what their number is?

Colin Day: Yeah. So the webinar that I did recently – again, it's on YouTube if you want to watch a quick recap of it – was talking about how there used to be this old commercial, almost 20 years old now, through a company called ING, which you may be more familiar with their current name, which is Voya.

So ING got purchased. Or actually they rebranded, I believe they're U.S. arm to Voya. They had a commercial called, “What's your number?” And it was all these people carrying these huge gaudy numbers under their arms. They're riding bikes in the city. They're walking their dog. Doing all these different things. And the concept was, you don't know your number, you should call your ING advisor to make sure that you get your number. That was the whole concept behind it.

And I thought really early in my career that it was an interesting thing to think about as a concept. But as I've grown in the financial planning profession, that is such an inadequate way of thinking about your retirement, especially when you're close to it. I don't prefer that methodology.

Ryan Potts: Right.

Colin Day: So, of course, you're probably asking, “Then Colin, why the heck did you create a spreadsheet which tries to answer, ‘What's your number?’” For those people that are maybe not as close to retirement, just wondering if what their advisor is telling them is the truth, that they think that they're heading in the right direction, to answer the most basic questions for those people. Maybe they're right out of school, in their 20s, maybe they're in their 30s, they have kids, maybe they don't. They're just trying to figure out, “Am I going in the right direction? Do I need to involve an advisor perhaps?”

Ryan Potts: Right.

Colin Day: That's what the concept is for this particular spreadsheet.

Ryan Potts: It's the North Star. It's the, “Am I on track?” Relatively, am I on track? And I think the biggest takeaway always is [that] at a young age, you're so far away from retirement that sometimes just having a North Star is more important than actually going through and figuring out thoroughly, are you on track?

You're so far away. There's so many variables. We just can't predict all of them.

Colin Day: Yeah, absolutely. Absolutely.

Ryan Potts: So speaking about variables, we could jump in then to maybe some of the inputs and just start right away with current income. I see on here that you've got W-2 wages, rental income, side businesses, annual bonus.

Obviously income's important. So maybe you could talk about some of the other versions of income that maybe aren't listed here, but [that] could fit within one of these.

But also the question then is, “Is there anything within income that is being taken into consideration?” Maybe it's taxes or something else.

Colin Day: Yeah. Let's start with taxes. So the numbers that I'm putting in here into the spreadsheet are all pre-tax.

And the reason is because I don't know what taxes are going to be in two years from now, let alone 10 years or decades in the future. So using a pre-tax amount just seems to settle people a little bit more because that's within their control.I can't control taxes, nor can you, and so thus, let's just use the pre-tax number.

So the kinds of things, like Ryan pointed out, that I put on here, we're looking for gross wages, if it's you as an individual, if it's you and a spouse. I put rentals, side business, and other things in there without knowing exactly what your personal situation is. So you're able to fill in as much information as you would like.

Some other things that you could add to the section might be things like alimony. Or maybe you are paid out of a family trust on an annual basis. Maybe you're currently receiving a pension while also working full time. Those are the kinds of things we're thinking about. Whatever is coming into you that could be used to spend needs to be included in this picture.

You could technically then also include things like a dividend portfolio.

Ryan Potts: I was going to ask you, so dividend and interest in portfolios could be included in here? Also, maybe it sounds like inheritance or if there's some kind of gifting that's occurring early on, you might want to include that in here as well.

Colin Day: Yes. The only caveat I'll put there is that it should be considered income. So for example, if you have a portfolio of investments that are producing dividends. If you're reinvesting those dividends, that isn't income. It technically is income. I understand that point. But, we are not receiving it and using it and spending it, which is what this particular spreadsheet is trying to indicate. If it's income, it's income that is coming in and I plan on it exiting, going somewhere at some point.

Ryan Potts: Awesome. Cash Flow based, money in, money out. That's how we're thinking about it.

Colin Day: Exactly. Awesome. So then, obviously we have income coming in. So the next part then is expenses. We need to make sure that we have an idea of what the expenses are now. So then we can determine, “Ok, what might we not have in retirement?”

So in this section here, we're trying to figure out – again, and this is future forecasting, so I'm trying to use the most basic types of items that we could forecast in the future. So I'm anticipating my kids – I'm knocking on wood for all of us that have children – I'm anticipating that my kids will be out of my life, at least off the dole, so to speak, once I'm in retirement.

So I put a line item for kids to say, “I am spending money towards them that I won't have to anticipate in the future.” This is tough for most parents. You might be paying for school. It might be a private school right now. It might be daycare. It could be college in the future. You are going to have some kind of expense that you may be incurring currently that you won't have to anticipate in the future.

So that's one of the examples. The other ones I put here [are] that if you've got a mortgage and you plan on it being paid off by the time that you get to retirement. There [are] also contributions to retirement accounts, which once you're in retirement, you generally don't fund retirement accounts anymore.

And then the last item is FICA. And I'll just make a note here. FICA is referring to Medicare and Social Security in this case. So, your money that you contribute towards those sources do exist for most individuals. Now, if you don't pay FICA because you're in a social security exempt employer, fine, you can remove that particular source.

There [are] also caveats in terms of how much you pay when it comes to social security. I did not cover that in this alpha version of the spreadsheet, I just made it super easy. We're just going to apply FICA to everything.

The only other thing I'll say is that if you are self-employed and you pay self-employment taxes and you pay both sides of it, as it's known, I'm paying both the employer and the employee side. It's not incorporating that. It's only doing the one side. So there [are] some caveats with these numbers, but we are playing pretty fast and loose with most of our numbers and assumptions.

Ryan Potts: From the inputs perspective, so current income expenses that won't exist in retirement, then you've also got additional expenses in retirement. And obviously these might be goals or something else you might be thinking about. That's like, “Hey, Ryan, what would I want to do in retirement?” Maybe it's golfing, traveling, whatever the case might be.

Colin Day: Yeah. So if there's things that we anticipate doing once we do get to retirement, in addition to what we're already having expenses for,the most common one is vacation. “Hey, if I'm not going to work anymore, I'm anticipating budgeting a certain amount of dollars towards airplane travel, cruises,” whatever, might be your vice.

We're putting that information in here. The other ones I put in here were grandkids as an example, or other kinds of medical costs that might be higher because you're no longer on employer-based health care.

Ryan Potts: So I was gonna ask you about that. Looking at both versions of expenses, those pre-retirement and those in retirement, is there a good rule of thumb for any of these inputs? If someone were to jump in here and say “Hey, I don't have kids right now. What is a kid going to cost me?” Is that something they should be considering?

Or, with the medical expenses. I see in here that we have $8,000. I'm not saying that you put that in there or whatever the case might be, but is there a rule of thumb that someone should consider? Is it 5% of my income in retirement? Is it a dollar amount that they should be considering?

Colin Day: Yeah. And this is tough because your mileage will vary because of your life condition. Like you said, kids, no kids, grandkids, no grandkids. From a medical perspective, are you considered healthy or not?

There [are] a lot of different numbers that we can work with. I normally put somewhere around $6,000 per individual for health care costs for retirement. If you don't feel like you are of average health, maybe you're below average health, then you may want to increase that number.

This is a little bit tough. If you are approaching retirement and are thinking about what you might be paying out of pocket for health care once you're at Medicare age, regardless of what anybody tells you, medical care is not free. Once we do get to Medicare age there are premiums, there [are] out of pocket costs,just like any other health insurance program. So that's why we always want to program something here. But again, I'll leave it up to you in terms of your research to determine what's an appropriate number there.

Ryan Potts: I think you're really highlighting the importance of working with an expert when it comes to retirement planning.

Colin Day: Yes.

Ryan Potts: Again, this is a North Star, kind of [a] guidepost. Are you headed in the right direction? Or if you don't know what the direction is, at least this can kind of tell you.

But maybe for someone who's 50, 55, 60, maybe 10 years away from retirement. Maybe they don't need the North Star anymore. Maybe they really need to start to figure out some of these intricate variables that you and I've been talking about.

Colin Day: Yeah, absolutely. If you're going through this, and there are so many questions, and you can't fill out, let’s say, 90% of the cells because you just have no idea, it might be time to call a financial advisor , or have the conversation and do the research, so that you feel more confident in, “Is this actually a tool that's going to work for me, or do I need that advanced level of care?”

Ryan Potts: Right, right.

So I think the inputs make a ton of sense. Now, obviously, something has to happen with the inputs to ultimately provide an output.

Colin Day: Right.

Ryan Potts: So, maybe let's talk a little bit about the assumptions that you have built in here.

Colin Day: So, we have the expense side, kind of the balance sheet or the cash flow side, on the left side of the spreadsheet. On the right side, now we're talking about rubber meets the road. What are some of the figures that we need to consider before we can get to an answer?

So, I put some assumptions in here. For example, you're going to have to declare how many years to retirement. So even if you're trying to fire – you're going to be financially independent or retire early – you can still put the years that you have to retirement to determine what's appropriate for you.

The investment growth rate, that's just an assumption based on portfolio value. I put it at 7% as a default. You can change it to whatever you feel is appropriate.

Inflation incorporated in here. I think it's important to at least show that there are going to be rising costs in the future.

We have annual Social Security estimates. So, without knowing exactly what's going to happen with Social Security in the future, you can put in your current Social Security numbers. Also mentioned here, if you do have a pension, this is where you can put that kind of information, because it will track the income on an annual basis.

Where it says employer retirement contributions, on the left side of the page we talked about things that don't exist in retirement. So your cut of what you're putting towards your 401(k) or your IRAs, we won't anticipate doing that in retirement. All we were looking for on that side of the page is your contributions, not the employer. That's the part that we need to put in the assumptions, “How much is our employer going to contribute towards our retirement problem?”

And that's what's going in the assumptions field and something that you can manipulate.

Ryan Potts: That might be in the form of a safe harbor match, profit sharing, whatever the case might be.

Colin Day: Exactly. Any kind of annualized contribution amount is what we're looking for there.

And so then we're gonna say, if we have an amount on the left side of the page – we should have mentioned: everything on the left side of the page does add up to a pre-tax retirement estimate as to what we need.

Then if we take out any kind of guaranteed income in retirement, so annuities, pensions, Social Security, we're gonna subtract that from the number and come up with the annual amount less Social Security. So we had this big number that we needed to reach, we have this guaranteed income that we're assuming is gonna come into us, and so now we have the number that our portfolio needs to help us with.

From there we need to put in our balances. So if I do have existing 401(k) dollars, I have IRAs, I have other types of investment accounts. Again, brokerage accounts, things like that. I want that represented in the current retirement balance section because these are for those accounts that are going to be used for retirement.

You'll notice I put in HSAs, because if we're using HSAs properly, we are not considering them short term investments. We're doing this over the long term. So we have the full balance then, and then we just do some very basic calculations using all the cells on here to say, “Hey, what's the future value?”

So if I've got money in my retirement account, where am I headed based on the investment return, inflation, the amount of money I'm contributing annually, both me and my employer? And other factors to then determine what the future value is.

And so it's going to come up with this gaudy number. This is what we need to reach. We have the future value that we are hoping to reach. But rubber meets the road on the second calculation, which is, what do I need?

So with what do I need, we're looking at this from, again, what do I actually need to make sure that that first number on the left side of the column, the pre-tax number aligns with it.

The example that I'm looking at right now shows that the future value exceeds the “What do I need?” Which is great. That's what we want. I'm going to have more money than what I need in the future. But if it's the opposite of that, “Oh, shoot. We need to do some work.”

Ryan Potts: Yeah. Maybe some steps you need to take in order to catch up or whatever the case might be.

Colin Day: Exactly.

So if it says that your future value is $1.5 million, but the “What do I need?” is $2 million, now we need to go back.

You can take a screenshot. You can make a mental note. Here are the things that I can manipulate. Maybe I'm going to work a couple of years longer. Maybe I'm going to add a little bit more towards my retirement. Maybe I'm going to cool it in terms of my expenses, what I think I'll spend in retirement. And all those numbers are going to start to maneuver themselves. So hopefully they are almost in alignment or, again, you're exceeding what you think you need for the future.

Ryan Potts: So I do have to ask not to get too technical or not to get into the math behind all this. And for those that are listening and haven't seen the spreadsheet yet, it's a great reason to go download it because Colin's done all the math for you. So you just have to put numbers in here.

But the “What do I need?” number. Now that we've gone through the inputs, the assumptions, and really figured out what it is, can you explain it to the audience in terms of, what exactly is the “What do I need?” number? In terms of that pre-tax dollar amount that we have figured out for expenses that needs to be coming from the portfolio.

Colin Day: Well, Ryan, are you familiar with the Trinity Study?

Ryan Potts: I sure am.

Colin Day: To make this very easy to digest, the “What do I need?” number is related to a number, a figure that financial advisors can at least use as a starting point as it comes to withdrawal rates from your retirement accounts once you do get to retirement.

So all we're basing this on is this Trinity study, which essentially says that if you can take about 4% out per year and have this money last for about a 30 year period. So mileage will vary. You can change the 4% to another percentage if you know how to go into the math. It’s not that hard.

But if we're trying to figure out what is a sustainable withdrawal rate for somebody's retirement, we'll normally start with 4% and then we'll migrate up or down depending on what their needs are.

So with the 4%, we're just taking that against the pre-tax number that we already believe we will need to have for retirement and then putting that into the calculation to determine, ok, this is the actual grand number that you need in terms of total assets by the time that you retire to be able to successfully make it through without risking running through the entire portfolio.

Ryan Potts: The very simple math on that is like, if someone said that their expense number was $40,000 that needed to come from their portfolio. They could take $40,000, divide that by 4%, and end up at a million. A million is hypothetically your number.

By doing it that simply though, you've foregone all the inputs in terms of the cash flows and outs. And so there is a reason why you'd want to use this kind of a calculator.

Colin Day: Yeah. So again, the calculator is what we call an alpha version, which is just to say, “Hey, we were testing something out.” I've had really good responses online. I've sent this out to almost 70 people, I think at this point, just from people coming to me through LinkedIn and Instagram. And it's great because everybody's giving me feedback on how to improve it in the future.

If you would like to download your version of the calculator, hit me up, send me an email: colin@correctcap.com will be the easiest way to do so. I will send you a link where you can make a copy of the spreadsheet. I do not see any of your information, so anything that you put into the calculator is between you and the internet, I guess.

If you have questions after going through the program and would like to discuss it, again, you have my email address. Say, “Hey Colin, here's a screenshot of what I've got in here, or could we do a screen share and you can walk me through this? Make sure I'm using it correctly.” I'm happy to do it.

So when it comes to the spreadsheet, I’d love your feedback if you take a look. We were talking ahead of this, I'd love to do more of this spreadsheet, but I want to make sure that there's interest in it. So again, if you're interested in getting a copy of that, just shoot me an email and I'll be happy to send you out a copy.

Ryan, what did I miss?

Ryan Potts: Nothing. I think you killed it.

This is an awesome calculator. It's easy to go through. Honestly, the best part about this is someone could sit down and fill this out in five minutes. The goal is not to have someone open this up and be like, “Oh, I need to go figure out all of this information first before coming to the calculator.”

A lot of this is off the top of your head. What's your gross income? What [are] your gross expenses? Figuring it out. I wouldn't say back-of-the-napkin math, but, it is. It's very efficient and I enjoy it.

Colin Day: Yeah, we're not making this harder than it needs to be. So again, if you're a person that is retiring in two years and you want to use this spreadsheet, the way that I would encourage you to use this spreadsheet is to just see what your trajectory is. And if you see some numbers that raise a red flag for you internally, we should probably find a time to chat.

If you're in your 20s and you're doing the same thing, you see some red flags, you can just manipulate this thing because you've got the best thing, which is time. You've got time on your side.

So regardless of where you find yourselves in terms of your preparedness or readiness for retirement, a tool like this could certainly help. Again, colin@correctcap.com, if you'd like a copy of this.

Ryan, thank you very much for joining me and for test driving this. I appreciate the feedback.

Until next time have a wonderful day.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.

As always, please remember investing involves risk and possible loss of principal capital. Please seek advice from a licensed professional. Correct Capital Wealth Management is a registered investment advisor. Advisory services are only offered.

Capital Conversations by Correct Capital Wealth Management

Whether you're in your 20s, just beginning to think about the future, or you're closing in on retirement, knowing your retirement number is paramount to living out the Golden Years of your dreams. If you’re curious about your number or want a copy of the tool we’ve discussed, feel free to reach out to me at colin@correctcap.com. If you think you’re ready to hire a financial advisor for your retirement planning, you can schedule a meeting with a member of our advisor team, contact us online, or give us a call at 877-930-401(k). It only takes 15 minutes to understand if we’re a good fit.