This is Part 2 in our series – Can You Afford to Retire?

Conventional wisdom says that you should have at least $1million in savings before you retire.  But the fact is, each person’s needs during retirement are different based on lifestyle, health, location, living arrangement, and a host of other factors. Before panicking that you don’t have enough saved, or assuming that you do, it’s important to run the numbers. And that’s where I come in.

Leveraging my background as an Engineer and corporate Finance Manager, and my experience as a Professional Daily Money Manager (PDMM), I work with clients to identify and analyze various scenarios to determine the impact of various life choices on how long their money will last. Understanding how long your money will last is important in helping you make informed decisions about retirement.

This kind of analysis is not rocket science, and anyone with a basic understanding of household finances can do it on their own.  The first step is understanding your assets and income. I start by gathering detailed information about assets such as checking accounts, savings accounts, brokerage accounts, real estate owned, etc.  The second important step is looking at any liabilities: mortgage, outstanding loans, lines of credit, etc.  On the income side, I gather information about things like pensions, rental income, social security, etc.

Next, I take a close look at expenses. These include things like mortgage payments or rent, homeowner dues, credit card payments, car maintenance, car insurance, homeowner or renter insurance, gas and electric, telephone, garbage, water, cable, Internet service, gardener, health insurance, medical co-pays, haircuts, dry cleaning, etc. This can be a “gotcha” area because it’s so easy to overlook the things we pay for in cash or routinely do – like multiple trips to the grocery store or entertainment activities – and don’t track. It helps to have someone asking the right questions to elicit the details for a complete picture.

Once I’ve gathered all the information, I develop a spreadsheet that details income vs. expenses for a typical month (usually based on at least 3 months actual data).  From there, I look for anomalies:  such as atypical spending levels around the holiday season.  Remember, you want a fairly typical monthly view.  Then, subtract your expenses from your income.  If you get a positive number, congratulations!  The good news is that you’re living within your means!  If you get a negative number, you are outspending what you are earning, which is a trajectory to financial discomfort. And if that’s the case, we need to do some additional analysis, which is what I’ll talk about next time.