Everyone wants to be confident that they are prepared for retirement but we all know how difficult it can be to be sure.
Calculating your Rich ratio can be a great place to start regardless of how close or far you are from retirement.
What is the Rich Ratio
The Rich ratio is a simple way to see if you are on track for retirement. In a nutshell, it is what you have divided by what you need. Or in other words, it is the retirement income that you already have lined up for yourself divided by the retirement income that you need.
The goal for your Rich ratio is to have it be more than 1. If it is, that means that you have more than enough retirement income and you are in good shape. If your Rich ratio is below 1, you may have to consider working longer or lowering your retirement expectations. And once you understand the math behind the Rich ratio, you’ll see how this can be much more important than how much you have saved.
Example #1
The Rich ratio calculation is straightforward. You add up all your estimated retirement income and divide it by how much you need/want to spend in retirement.
Let’s say a retiree knows he’ll have the following monthly income in retirement (after taxes and reductions):
His Social Security: $1,500
His Spouse’s Social Security: $1,500
Retirement Savings Balance of $600,000 and using the 4% rule, we’ll assume it produces a monthly income of about $2,000 per month.
Total Monthly Income: $5,000
This would be the first part of the Rich ratio. The second part is knowing what he’ll need/want to spend in retirement. Let’s say that this almost retiree adds up all his retirement expenses/desires and get a total of $4,500.
This means his Rich ratio would be:
$5,000 / $4,500 = about 1.1
As we stated before, a Rich ratio of higher than 1 is great so this almost retiree is in good shape.
Example #2
In this example, let’s say an almost retiree has the following retirement numbers (after taxes and reductions).
His Social Security: $2,000
His spouse’s Social Security: $2,000
Retirement Savings Balance of $1,500,000 and using the 4% rule, we’ll assume it produces a monthly income of about $5,000 per month.
Total Monthly Income: $9,000
Let’s say that this almost retiree adds up all his retirement expenses/desires and because he lives in an expensive city with high taxes and has big travel goals, he gets a total of $ 10,000 per month.
This means his Rich ratio would be:
$9,000 / $10,00 = .9
Despite having over a million saved for retirement, because his Rich Ratio is below one, he’ll have to decide what to adjust to make his retirement numbers work for him.
Conclusion
My goal with these examples was to show simple scenarios with easy numbers. Your situation may not be as simple and you’ll have to think about how taxes and other reductions will affect your income sources as well. But as you go through the process of calculating your own Rich ratio (even if it takes you some time) it will help you become much more aware of where you stand for retirement.