A Five-Minute Retirement Check: Spending, Social Security and the Gap

Retirement can feel like a number too large and too far away to think about. One way to shrink it is to run a rough check that takes a few minutes: what would a year of life cost, what arrives from sources other than savings, and what is left over. This article walks through that check and is open about where a quick estimate stops being useful.

Key takeaways

• A rough retirement check starts with yearly spending, subtracts income that arrives outside your savings and looks at the gap that remains.
• A Social Security Statement shows personalized benefit estimates and your earnings history, and reviewing it each year can catch problems.
• Multiplying the yearly gap by 25 is a rule of thumb that matches withdrawing about 4 percent of savings a year, and it is not an official guideline.
• In a hypothetical $80,000 budget with $32,000 of other income, the gap is $48,000 and the rule of thumb points to about $1.2 million.
• A mortgage that is paid off by retirement can lower the yearly gap noticeably, which is one reason housing costs belong in the picture.

Step one: a year of spending

Start with what a typical year costs once paychecks end. Housing is often the largest piece, covering any mortgage payment, property taxes, insurance and upkeep. Then come food, transportation, health care, insurance, gifts and travel.

Many households find it easiest to start from what they spend now and then adjust. Some costs fall in retirement, such as commuting or saving for retirement itself. Others may rise, such as health care.

Step two: income that does not come from savings

Next, list money that arrives regardless of the balance in your accounts. For many people the main item is Social Security. A workable estimate is available through a Social Security Statement. The Social Security Administration says the Statement can be viewed online through a my Social Security account and includes a bar graph of personalized retirement benefit estimates at nine different ages, depending on when benefits start, along with your earnings history and information on how to report an error. The agency encourages people to review it each year.

That last part matters. Benefits are figured from the earnings record, so a mistake in the record is worth catching early. The estimates are just that, estimates, and they depend on your earnings and on the program's rules at the time. Pensions or part-time work can be added in the same way.

Step three: the gap

Subtract the second number from the first. What remains is the yearly gap that savings would need to cover.

A rule of thumb for the gap

A commonly cited shortcut multiplies the yearly gap by 25. That is the same as assuming savings are drawn down at about 4 percent a year. It is a rule of thumb, not an official guideline or a guarantee.

For example, imagine a household that expects to spend $80,000 a year and expects $32,000 a year from Social Security and other income. The gap is $48,000. Multiplied by 25, the shortcut points to about $1.2 million.

The assumed withdrawal rate drives the answer, which shows how sensitive it is.

• At 3 percent, the same gap points to about $1.6 million.
• At 4 percent, about $1.2 million.
• At 5 percent, about $960,000.

Real life will not follow a straight line. Investment results change from year to year, prices rise, taxes depend on the type of account, and no one knows how long retirement will last. The figure is a starting point for a conversation, not a target to chase. A tax professional or financial professional can help translate it to your accounts.

Where the mortgage fits

Housing sits in the middle of this picture. If that same household's $80,000 of yearly spending includes a mortgage payment of $1,800 a month, or $21,600 a year, and the loan is paid off by retirement, spending drops to $58,400 and the gap falls to $26,400. The rule of thumb then points to about $660,000, roughly 45 percent less than before.

That does not mean paying off a mortgage early is the right call for every household. Money sent to a mortgage is not available for other uses, and it takes away from cash on hand and from other saving. It is better seen as one more variable to weigh: when will the loan be paid off, and what does the plan look like both ways?

Questions to carry forward

1. Have I looked at my Social Security Statement this year, and does my earnings record look right?
2. What would my spending be in the first year of retirement, line by line?
3. How much of that spending is housing, and what happens to it if the mortgage is paid off?
4. How sensitive is my gap if I change the assumptions a little?
5. Who can check my numbers, including how different accounts are taxed?

The check takes only a few minutes, but it replaces a vague worry with figures that can be tested and refined over time.

Common questions

How do I get my Social Security Statement?

The Social Security Administration says the Statement is available online through a my Social Security account. It shows personalized retirement benefit estimates at nine different ages and your earnings history, and the agency encourages people to review it annually.

What is the multiply-by-25 rule?

It multiplies the yearly amount you would need from savings by 25. This matches taking out about 4 percent of the savings each year. It is a rule of thumb, so real needs depend on returns, inflation, taxes and how long retirement lasts.

Does paying off a mortgage change how much I need to save?

It can. Housing is usually one of the largest costs, so a household without a mortgage payment may have a smaller yearly gap to cover from savings. Whether to pay a mortgage faster involves trade-offs with saving and cash on hand.

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