This is Part 3, the final chapter in our series – Can You Afford to Retire? 

In Part 1 of this series I talked about the importance of having a good understanding of your financial situation when making decisions about retirement. In Part 2, I shared the steps for beginning that analysis. Here’s a recap:

1. Gather information about assets and income – real estate owned, rental income, pensions, etc.
2. Understand your liabilities – mortgage, outstanding loans, lines of credit, etc.
3. Take a close look at expenses – be sure you consider everything thing from the big expenses like mortgage or rent payments down to the multiple trips to the grocery store
4. Develop a spreadsheet detailing income vs. expenses for a month (based on at least 3 months actual data) – look for anomalies, such as extra spending around the holidays
5. Subtract your expenses from your income

If you’ve gone through this process and get a positive number, congratulations! You are living within your means.  If, however, you’re spending more than you’re earning, it’s time to continue the analysis.

The next step is to take a look at your liquid assets.  Those are assets that could be turned into cash TODAY such as checking and savings accounts, precious metals and some investment accounts.  Things like real estate holdings, antiques, and automobiles are considered non-liquid assets because it takes time and risk in order to exchange them for cash.

List out your liquid assets, and assign each of them a value.  On your list, note the date the valuation was made (this should be on the valuation statement for the asset).  Since the value of many assets changes over time, your analysis is only good on the date done.

What I do next is calculate the burn rate:  that’s the rate at which you are literally burning through your assets. Here’s how it’s calculated:

Total liquid assets divided by the difference between income and expenses.

Depending on whether you’re expressing your deficit in months or years, this will yield a very rough idea of the number of months your money will last.  For example:

$1,000,000 (assets)/ $50,000/year (burn rate) = 20 years (your money will last for 20 years)

Keep in mind that this is a very, very simplistic way of looking at things, but I like to say that it’s at least directionally correct. The basic analysis of whether you’re living within your means is an important place to start.  If the answer is yes: keep up the good work and (depending on where you are in your work life) see if you can start to set aside even more savings for retirement.  If you’re retired, don’t get complacent, because life often hits us with unexpected surprises as we age and a cushion of funds is important to have.

Whether your analysis indicates you’re living within your means or not, this is a great exercise to determine if there are spending categories that merit some examination.  Ask yourself:  are my monthly expenses in line with those of a typical family in my geography?  Are there areas where I could tighten up or are there areas where I deserve to loosen up?  There are no right or wrong answers, but working with a financial professional or two can help.  I suggest starting with a Daily Money Manager and a Financial Advisor or Financial Planner.  Managing your finances responsibly toward or in retirement doesn’t have to be scary. And, you don’t have to do it alone.

Please feel free to contact me for a free 30 minute consultation if you would help in working through the process I’ve described in this series!