Creating a Financial Plan 5 – Pre-Retirement Planning

“I find it fascinating that most people plan their vacation with better care than they do their lives. Perhaps that is because escape is easier than change” ~ Jim Rohn

Retirement Planning is the next step in Creating a Financial plan, and it has two components

Planning when you can retire – How much capital you need and how it should be structured so that you avoid returning to work. 

Planning how to be retired – How to distribute that capital when you’ve retired and align it with Social Security, Medicare, and other retirement strategies. 

These two aspects called Pre-Retirement Planning and In-Retirement Planning. We will look at Pre-Retirement Planning today, and In-Retirement Planning next week. 

Pre-Retirement Planning

Most of us will retire, and a planned retirement is a great retirement. Some people claim they will never retire, that they love what they do and will never stop. But they don’t know what it feels like in a 65 year old’s body. Regardless of how much you love your career, at some point you will minimally want the option to stop doing it on someone else’s schedule. 

Retirement, thus, may be defined as the ability to choose what you will do with your time and your energy without the need to earn income. Whether you choose to devote your time to grandkids, golf, gardening, charity, or an encore career after that, is entirely up to you. 

Many seek to retire comfortably: to not worry about money after they leave their job.

They should also seek to stay comfortably retired: to ensure they don’t run out of money.

Before you retire, the focus is on Accumulation: amassing enough capital so that you can continue receiving a paycheck after you are no longer working for it. 

The further you are away from retirement, the more nebulous it becomes and the harder it is to make specific plans. The closer you get the more firm you plans can and should be.

Pre-Retirement Planning begins like Financial Planning does: determining where you are and where you want to be. There is a seven step framework to pre-planning your retirement.

  1. Identify a Target Date
  2. Determine Income Requirement 
  3. Estimate Social Security/Pension Income
  4. Calculate Principal Income Retirement
  5. Calculate Retirement Principal
  6. Calculate Savings Requirement
  7. Assess, Adjust, Align

Let’s look at each. 

1. Identify a Target Date

“I’d like to be retired by…”

Pick an age that you think you’d like to be retired. This can change, but you must start somewhere. Often as people approach retirement, their desire to be retired by a specific year becomes clearer. 

Some key ages that people often pick are:

  • Age 50/55 – Some pensions are available to government employees. (Note: Most people don’t retire by this age.)
  • Age 60 – Retirement funds are available penalty free after age 59 1/2. 
  • Age 62 – Earliest age Social Security is available.
  • Age 65 – Medicare is available. Anyone retireing before this age will need a plan in place for health care, which is not cheap.
  • Age 67 – Full retirement age for Social Security (for most people).
  • Age 70 – Latest you can delay Social Security for more income. There is no benefit to delaying Social Security beyond this age.
  • Age 72 – IRS requires distributions from 401(k)s and traditional IRAs.

Most people tend to retire between Age 60-67. If you’re looking for a place to start, 65 is a very popular option for health insurance reasons. 

2. Determine Income Requirement

How much do you want to live on? Ignore inflation for now, and use today’s value. I like to have this expressed as a monthly net amount for basic expenses, plus an annual amount for “fun stuff.”

The closer you are to retirement, the most definite these numbers should be. Rough estimate are fine if you’re 30 trying to retire in 35 years. They are not fine if you are 64 trying to retire at 65. 

We’ll look at two example couples throughout. The second would like to live on roughly double what the first example wants to live on.

Example A Goal: ~$75,000 per year in Spendable Income.

“We want $5,000 per month hitting our bank, with another $10,000 available for vacations and gifting.”

That equals $70,000 per year, net. Let’s throw an amount in for Medicare: $5,000. You may need to go much higher if you’re currently unhealthy. $80,000 before taxes. 

This is a couple Married Filing jointly. With some tax planning, they determine that federal and state taxes could be estimated to be $15,000 per year.

Example A Gross Income Requirement: $95,000/year.

Example A couple will need to withdraw $95,000 per year to hit their Spendable Income goal. 

Example B Goal: ~$150,000 per year in Spendable Income. 

“We want $10,000 per month hitting our bank, plus $40,000 per year in fun money.”

$160,000 net. Plus $8,000 for Medicare. $168,000. Plus $60,000 in taxes: $228,000 gross. 

Example B Gross Income Requirement: $228,000/year.

You can start to see where tax planning fits in with Retirement Planning. These gross income amounts are assuming all income is taxable. If you have (or plan for) large Roth accounts as well, then the Gross Income requirement will be smaller for the same Net Income result.

3. Estimate Social Security/Pension Income

If you have a pension, run estimates on what your monthly income will be at your target retirement date. That will take up some of that monthly income. 

CAUTION: If you are married and are planning to take a joint option (usually less monthly income, but a surviving spouse will get income if the pension holder dies first), make sure you use that same joint option estimate. Often a pension statement will have an estimate on the statement, but that is based on Single Life estimates (just the pension holder), and does not include spouses. You may have to run a separate estimate to find the joint amounts. 

Everyone should run a Social Security Estimate. You can run a Social Security Estimate on SSA.gov. Create a profile if you haven’t, and from there you can download your latest statement and review your income history for errors. 

Example A Result: $48,000 per year for two Social Security incomes if taken at Retirement Target Date. 

Example B Result: $57,000 per year for two Social Security incomes if taken at Retirement Target Date. 

Note: The more money you earn, the less Social Security will make up for you at retirement. That is because their are breakpoints in the amount your income counts toward your Social Security. So even though it would appear that Example B makes twice as much as Example A, their Social Security is not twice as big. 

4. Calculate Principal Income Requirement

Social Security (and a pension, if applicable), will make up a base income for retirement. You will need to derive the rest of your retirement income from your Retirement Principal, the capital sum of all retirement investments you have. We will reverse into what we need for a capital sum by figuring out how much we need for income. 

Subtract your annual Social Security (and pension) estimate(s) from your Gross Income Requirement. 

This is your Principal Income Requirement, or the income you must get from your Retirement Principal. 

Example A Result: $47,000/yr. ($95,000 in GIR – $48,000 in SS = $47,000)

Example B Result: $171,000/yr 

5. Calculate Retirement Principal

Your Retirement Principal (the capital sum of all your retirement accounts) will need to be enough to create a retirement income you cannot outlive. To wit, it will need to create an income that lasts the duration of your retirement, goes into the direction it must go to exceed the rising cost of living, and have the deviation to flex with the changing landscape. You need Three Dimensional Retirement Income. We covered this in Episode 2: The Principal Problem. 

You will peel off a percentage of your Retirement Principal each year to cover your Principal Income Requirement. But you cannot take too much, or you will run out of money. What is more, you will need to take a great number, on average, each year to match the rising cost of living. 

Your Retirement Principal will need to be big enough so that the average annual growth of the Principal, minus the average annual inflation, equals your withdrawal percentage. Use reverse math to figure it out. 

The calculation depends on what you use for assumptions, and it deeply tied to what your investing plan is in retirement. 

If you assume inflation is 2%, and your portfolio will average 6%, you can withdraw 4% of your Retirement Principal each year. 

   6% growth

– 4% withdrawal

= 2% net growth on your portfolio. 

2% growth means that the next year, your 4% withdrawal will be 2% higher, keeping in step with 2% inflation. 

If you assume inflation is 2% and your growth will be 7%, you can withdraw 5% on average. 

   7% growth

– 2% inflation

= 5% withdrawal

You can use whatever assumptions you want (assuming they are reasonable) to get your withdrawal. 

   7.0% growth

– 2.5% inflation

= 4.5% withdrawal

   5% growth

– 2% inflation

= 3% withdrawal


If we assume a 4% withdrawal rate, your Retirement Principal needs to be 25 times larger than your Principal Income Requirement. 

Example A Principal @ 4%: $1,175,000. 4% of that number is the $47,000 the client needs annually. 

Example B Principal @ 4%: $4,275,000. 4% of that number is $171,000 per year. 

If we use a 5% withdrawal rate, the numbers change. We only need it to be 20 times larger for a 5% withdrawal to equal our PIR.

Example A Principal @ 5%: $940,000.

Example B Principal @ 5%: $3,420,000. 

What a difference! The difference between assuming a 6% rate of return and a 7% rate of return is almost a quarter million, and a full million for these two examples. Having to reach one number or the other before you can retire means retiring several years earlier, or later. 

What you can withdraw depends on your investing plan. And your tax plan. And your insurance plan for protecting against unknowns. It’s all connected. 

If you haven’t made the link between your Investing Plan and what you should assume for Rate of Return, then I would error on the side of conservative.  Multiply your Principal Income Requirement from Step 4 by 25.

But we aren’t done yet. These are in today’s dollars. If you have a ways to go before you retire, you need to inflate this number out to your Target Retirement Date. We need to find the amount that will produce our Retirement Income Goal in future dollars. 

If you are retiring in the next year or two, you have already calculated your end Retirement Principal. If you are several years or decades out, you must inflate that number. 

Use a Time Value of Money calculator to do this where:

  • N = Number of periods until you retire (months or years, depending on settings)
  • I/YR = Inflation (2% for starter. Higher if you want to be more conservative.)
  • PV = Your number you calculated early (make it negative)
  • PMT = 0
  • Solve for FV. 

Results for the examples if they were retiring in 10 years:

Example A Retirement Principal @ 5%: $1,150,000.

Example B Retirement Principal @ 5%: $4,175,000. 

This is your Retirement Principal, the capital sum of all your retirement accounts you will need to retire comfortably and stay comfortably retired on your desired date.

6. Calculate Savings Requirement

Now that we know our tentative Retirement Principal Goal, we need to calculate how much we need to save to get there. 

You are already on your way to this final number. You already have retirement savings and investments in your 401(k)s, pensions, IRAs, and other places. If you completed Step 1 of Creating a Financial Plan, Get Organized, then you will already know how much you have saved toward this goal.

Don’t underestimate the power of compounding. Many people look at their Retirement Principal goal and what they have now and despair. They have less than half of the goal with less than ten years to go. But invested properly, your current assets may double or more between now and your goal. Adding to it will help.

If you only have a few years until your retirement, you can use a Time Value of Money calculator to get a rough estimate of what you need to save where:

  • N = Number of periods until you retire (set to months)
  • I/YR = Expected ROR (Based on Investing Plan)
  • PV = Your current retirement portfolio balance (make it negative)
  • FV = Your Target Retirement Principal
  • Solve for PMT

This calculation will give you the estimated amount you would need to save monthly to reach your goal. This is all savings, so if you are getting a match through an employer, that would count toward this monthly amount. 

If you’re more than a few years out, you can’t use this function because it assumes a flat savings rate. If you have 20 years to go, you’ll be able to save more ten years from now than right now. The monthly savings amount this calculation will show will be unattainable now, and might be too little by the end of your career. 

There is an easier and more effective way of calculating this regardless of how far out you are. We’ll cover that in the Practical Planning section after Step 7. 

7. Assess, Adjust, Align 

After completing steps 1-6, you likely came up with a number at the end that is way off base. For many, they realize they are behind where they need to be to hit their target, and the savings requirement to reach their target retirement falls somewhere between improbable and impossible. Now we know. Time to Assess, adjust, and align.


Look back over your numbers and assumptions. Did we make a math error? Did we use any numbers that are unrealistic? Is our assumed rates of inflation and investment return reasonable? 

Then step back further. Is our Target Retirement Date and Income what we actually want? Or can those be changed?


Making small changes to our dates and returns and savings rates can change the final number drastically. 

One of the biggest changes we can make is adjusting our target date of retirement. Each year we wait to retire, the more money we will have for retirement. This happens in three ways

  1. We have one less year of retirement income that we need (though if we plan to always live off the growth and never touch the principal, this doesn’t matter).
  2. We have one more year of saving into retirement, typically in our highest earning and savings years.
  3. We have one more year of all our investments compounding. This is the most important aspect, which we understand better when we grasp compounding.

Imagine you introduce one lily pad to a pond. That lily pad will make a new lily pad each day, and so will every pad that is made, so that the total amount of lily pads will double each day. Between day one and day thirty, the pond goes from one lily pad to completely covered in pads. 

Question. On what day, between day one and thirty, will the lake be half covered in lily pads? 

Answer. On day 29. It will go from half full to full between day 29 and 30. 

Now, investments don’t double every year. But in our pond example, mightn’t even adding a few hours on to the end of day 29 produce as many new lily pads as have been produced in the last few days.  

NOTE: You need a solid investing plan all the way to and through retirement for this compounding to be effective. If you’ve accepted the traditional industry cover-their-butts guidelines and are down to 60% or less equities in your portfolio, extra years at the end won’t have as much impact as an equity based retirement investing plan. You must, of course, know what you’re doing and preferably have help to hold on to lots of equities in the final years before retiring without falling to the Four Horsemen. Get a professional that can help with this that knows what they’re doing. 

So it is with waiting to retire. With the right investment planning, market cycles, and savings, you might increase your Retirement Principal by 30% by waiting a couple years.  

Other adjustments include adjusting your desired monthly income or annual fun money. You might be surprised what reducing your monthly retirement income by $500 will do. 


If you’ve made some adjustments, but simply can’t or don’t want to adjust the end goal any further (income or date), then you must align. You’ve assessed your values, and you’ve told yourself, and perhaps each other, that you want this kind of retirement by this age. But your current actions are not in line with what you say you want.

It’s time to align your current actions with your retirement values. Spend less, save more, downsize. Pull whatever levers you need to to align you current actions with the projections.

Then, if necessary, repeat steps 1-6 until everything is in sync. Then you’re on track to retirement.

Practical Planning

If all this sounds like a lot of calculation and work, it is. Don’t let anyone fool you into thinking you can create an effective retirement plan in five minutes.

But it can be easier to calculate that doing it manually. Use a Financial Planning Software such as RightCapital to assist in your planning. If you completed Get Organized using RightCapital, you’re on well on your way. 

RightCapital’s Retirement Planning module is where is becomes so effective. There are a lot of moving parts to a Financial Planning, and all of them affect your Retirement Plan. It is especially hard to effectively estimate the various growth rates of a plan by hand. Each has separate percentages, and you’ll want educated estimates of:

  • Inflation – Right Capital will use current CPI estimates for this and apply it not only to cost of living, but anything else you want tied to it.
  • Income Growth – You can tie this to inflation for cost of living adjustments to income, or set a separate rate based on your career and industry.
  • Savings Rate – If this is expressed as a percentage of income, then as your income grows, so does your savings.
  • Investment Return – Each type of investment has a different percentage return, and RightCapital will automatically calculate the weighted average of all those returns based on your assets. 
  • Tax Rates – RightCapital will automatically deduct the right Federal and State taxes at all income levels, including when rates go up in 2026 when the Tax Cuts and Jobs Act expires

Effectively calculating all this by hand is a nightmare. Using the software can help. 

RightCapital will not only show you your Current Plan (what is likely to happen based on everything you have put in), but it also can generate a Proposed Plan. 

You can adjust settings in the plan to show different outcomes. For example, you can tweak the retirement date for one or both of you if married. You can adjust your savings rate, or see what might happen if you increased the equity allocation of your investing plan. 

If you learn visually at all, then the outputs of RightCapital or other software will help you visualize your plan and adjustments to it. This can be a powerful motivator and extremely helpful in improving outcomes.

WARNING: Garbage In, Garbage Out.

RightCapital (and any other software) can only process what you put into it. If you feed it faulty assumptions and numbers, it will give you faulty projections. Anyone can manipulate software to show a (fake) positive outcome. Financial Planning Software is meant to assist with Financial Planning. It does not do the planning for you. 

Use RightCapital or another software to help plan your retirement. It will give you much better results than trying it manually. You can click here to start using RightCapital for free. Our gift to you. 

It is never too early to start planning for your retirement. Get started now, and your older self with thank you. 

This may still be overwhelming, and you may consider asking for help. Begin to ask yourself, “Would I be better off diverting some of my savings into retirement accounts into a retirement plan instead?” 

For many people, the answer is unequivocally “Yes!” 

Getting guidance through this process will be instrumental in your success.

If you want help in planning for your retirement, we are here to assist. And in a few weeks we’ll share how to find help for yourself. Stay tuned for that episode. 

This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are the opinions of the people expressing them. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.