Only 3 Numbers Really Matter for Retirement — Do You Know Yours?

Are you ready to retire or not? It can be difficult to answer this question. However, there are three key numbers that you need to look at which will tell you everything that you need to know about whether you are ready to retire.

Here’s what they are.

1. Investment account balance

The first big number that you need to know is your investment account balance. That’s the amount of money that you have set aside in your 401(k), IRA, and taxable brokerage accounts. You must know this number because the money from these accounts will supplement your Social Security income. It is also important to consider the “tax-adjusted” value of these accounts, as a dollar in a taxable 401(k) will eventually be reduced by income taxes, whereas a Roth IRA remains tax-free.

You can’t live on Social Security alone, so you should have additional savings to help you pay the bills as a retiree. Once you know the total amount you have invested, you can determine how much income your accounts will provide using a safe withdrawal rate.

Experts recommend withdrawing 3.7% of your account balance in your first year of retirement. So, if you have, say $850K in your investment accounts, you would multiply that number to determine that you would have $31,450 per year in income from savings to spend. While the 4% rule was long the standard, modern retirees may need to adjust this percentage downward for longevity or upward if they utilize a dynamic spending strategy that reduces withdrawals during market downturns.

2. Social Security benefit

The next big number that you must know is the amount of your Social Security benefit. Your Social Security payment is also going to be a crucial source of retirement income and, unlike your savings, this source of funds is guaranteed to last for life and has built-in protections against inflation.

Your Social Security benefit is designed to replace around 40% of your pre-retirement income. However, for some people, it will replace more and for others, it won’t replace as much. Higher earners have a lower portion of their earnings replaced as the benefits formula is progressive. Your age when you claim benefits also matters, as those who file for benefits before their full retirement age are faced with penalties for early filing while those who delay past FRA get delayed retirement credits that increase benefits.

Whether you claim earlier or late is going to depend on your financial situation, as well as whether you would prefer more smaller checks or fewer larger checks. If you expect a long life expectancy or need your spouse to receive a large survivor’s benefit, then a delayed claim is also advisable. Calculating the “breakeven point” for delaying until age 70 can help determine if the higher monthly check outweighs the years of missed payments.

Ultimately, though, the key thing that matters here is how much your benefit will be. That number will help determine if you have enough income when combined with savings. You can visit your online Social Security account to see how much money will come from these benefits so you’ll know how much income they’ll provide for you to spend.

3. Annual expenditures

Finally, the next key number you need to know is how much you are going to spend each year. That’s because you must make sure your combined income from Social Security and savings covers all of the spending that you need to do. If it doesn’t, then you are not ready to retire. If your Social Security and savings will provide enough to cover your costs — including healthcare expenses and long-term care contingencies you are likely to incur in retirement — then you can quit working.

You can set a retirement budget to figure out this number or estimate that you’ll likely need enough income to replace around 80% of the amount you were earning at work before retiring. Many retirees follow a “spending smile” pattern, where expenditures are high in the active early years, dip in the middle, and rise again later due to medical costs.

By calculating these three numbers and accounting for sequence of returns risk—the danger of a market drop in the first few years of retirement—you can make the best and most informed choices about retirement so you don’t leave work too soon and find yourself facing regrets.

Editor’s Note: This article has been updated to include information on tax-adjusted account balances, the debate surrounding safe withdrawal rates, and the impact of sequence of returns risk on early retirement. Additional context was added regarding Social Security breakeven math and the phased “spending smile” model of retirement expenditures.