Archive for July 2013

Do I Have Enough Money To Retire?

“Do I have enough money to retire?”

This is one of the top questions I receive. It is usually asked by someone who is deciding when to retire, and they want to be financially prepared.

Let’s define retirement from the perspective of most people.

retirement date n. that moment when a person ceases to earn money and begins living on money from other sources – sources which include social security, pensions, retirement savings plans, and other investments.

Let’s back to the question – “Do I have enough money to retire?” The hidden message behind the question is, “I don’t want to run out of money and end up eating dog food to survive.”

Here’s the rough step-by-step calculation I use that can help you answer this question:

  1. Determine your monthly guaranteed income (social security, pensions, annuities, rental income, business income, etc.)
  2. Determine your monthly expenses (include savings for known upcoming non-monthly expenses like Christmas, vacation, car repairs, house repairs, annual insurance premiums, etc. Be sure to include even longer term expenses such as vehicle replacement and major appliance replacement.
  3. Subtract #2 from #1. This will determine your “monthly financial gap” (if one exists). If you have no gap, congratulations! You are in great financial shape. If there is a monthly financial gap, continue to step #4.
  4. Multiply the “monthly financial gap” by 300 – This is your “projected investments required” to provide enough income for the gap.
  5. Add up the total value of all of your investments – retirement savings plans, stocks, mutual funds, etc. and compare to the number calculated in step #4. If the total value of your investments meets or exceeds your “projected investments required,” you are in the financial position to retire!

Here’s an example:

Suppose Tom and Mary are preparing to retire. They are eligible for Social Security monthly payments of $2,875. They also have a small pension that will pay $300 per month. Their monthly expenses, including savings for short and long term known upcoming non-monthly expenses, are expected to be $4,500 per month. They have saved up $450,000 in their retirement savings plans – 401(k), 403(b), and Roth IRA.

Let’s use the steps to see how much they need to have saved to retire well.

  • Step 1  Monthly guaranteed income is $3,175
  • Step 2  Monthly expenses are $4,500
  • Step 3  Monthly Financial Gap is $1,325
  • Step 4  The “Monthly Financial Gap” is multiplied by 300 which provides a “Projected Investments Required” of $397,500
  • Step 5  Because they have have $450,000 in their RSPs, they appear to be in great shape!

A few notes:

  1. This is a rough calculation. I encourage any person who is preparing to retire to meet with a retirement specialist to walk through individual needs.
  2. It is appropriate to understand taxes to ensure that money is utilized in the most tax-efficient manner. Using the services of a retirement specialist and CPA can help with this.
  3. Ensure that appropriate insurance is in place. This includes consideration of long-term care insurance and life insurance policy analysis.
  4. This calculation essentially assumes a 4% nest-egg growth rate that provides necessary income and preserves capital.

The Definition of Investing

I recently conducted a survey and received hundreds and hundreds of responses. One of the questions I asked was:

Which (if any) of the following financial areas do you feel CLUELESS about?

The top response was Investing.

With phrases like mutual funds, ETFs, stocks, bonds, brokers, margin accounts, rate of return, yield rate, P/E, market capitalization, and current ratio, it can literally feel as if investing is another language!

I know the feeling as I’ve been there! Because of the results of this survey, I am tasking the I Was Broke. Now I’m Not. team to aggressively address this issue. We are hard at work developing resources that are going to help take people from “clueless about investing” to “financially confident and competent investor!” You will be seeing these resources being released over the next several month, and we can’t wait to share them with you!

In the meantime, let’s start by presenting a working definition of “investing.”

Investing  Using your money and possessions to create more money and possessions.

The goal for any investment is to gain more in return. There are countless ways to do this, and we are creating resources to help people maximize their investing efforts.

I look forward to sharing more in the very near future!

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SERIES: Investing Fundamentals Part 5 – Practical Opportunities for Investing

Welcome to the latest series at – “Investing Fundamentals”  Investing is consistently rated by our audience as one of the most confusing topics they face. In this series, we are going to share some foundational principles that can really help you understand investing better!

Five  Practical opportunities for Investing

Stocks  When you own stock in a company you technically become a part owner of that company. You have some claim to the assets and earnings of the company. Stocks are foundational to most investment portfolios. They are known to be very volatile in the short term but have historically outperformed other investments in the long run.

Mark Twain has famously said this about investing in stocks:

“October: This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February.”

There are two major different types of stocks

  • Common Stock  Common stock allows the holder to vote in shareholder meetings, depending on the amount of stock owned, and provides access to dividends (profit sharing) produced by the company.
  • Preferred Stock  Preferred stock holders are a step above common stock holders because they have priority over common stock holders. This applies in many areas including when dividends are being paid to shareholders.

Bonds  A bond is generally less risky. A bond is a large debt owed by a company, government, or even a school, where the borrowing institution has agreed to repay an established amount of interest payments for a set period of time. When this time expires, the borrower then returns all of the principal back to the lender(s). Bonds can vary in maturity times anywhere from 1 year to 30 years (or more)! The longer the time, the more interest you could accumulate.

I like to think of my personal residence as a bond investment.

Mutual Funds & Exchange Traded Funds (ETFs)  Mutual funds and ETFs let you accumulate a wide variety of investments you couldn’t normally obtain without consuming large amounts of time and money. Mutual funds and ETFs are funded “mutually” by you, me and millions of our closest friends. Our money is pooled together and then used by the “mutual fund managers” to invest in hundreds of other company stocks, bonds, and other sorts of investments. Usually mutual funds and ETFs have specific charters that direct their investments. One mutual fund might only focus on established companies in the United States while another could focus on investing in up-and-coming companies in third world countries.

Other Investing Opportunities  People so often hold themselves to these common types of investing and never branch out. Investing opportunities are all around you! You can invest in a small home and rent it out. You could invest in small businesses in your community. When you are investing you can think outside the box. Some of the greatest returns can be found when investing in unorthodox ventures.


  • Review your investments and know what you are invested in.
  • Start to think OUTSIDE of the stock market when you are investing!
  • Start investing!


NOTE: This post contributed by IWBNIN intern – Craig Fatt