The ‘Fill The Gap’ Strategy For Your Early Retirement Planning

How much money do you need to retire?

To hear Wall Street tell it, you need to amass between $1 million and $2.5 million in retirement savings if you want to live comfortably when you quit the 9-to-5. That’s a huge spread. And big numbers like these can strike fear in the heart of even the most prudent would-be retiree.

Map your unique road to retirement

Before we buy into the scare tactics, we should note that these estimates actually raise more questions than they claim to answer.  Like, “Is this an accurate range for everyone?”  And, “Is it realistic for most folks to have this level of savings?” My answer to both of these questions is no.

Sure, it’s great to have a large nest egg for retirement, but that’s not the only road to a happy, financially secure retirement. Instead of focusing on hitting an arbitrary big, round number in your investment portfolio, another approach to retirement planning is using my Fill the Gap (FTG) strategy.  Using this strategy, you create a financial formula that fits your individual retirement needs.

Before we delve into my FTG approach, let’s run through Wall Street’s recommendations and what’s behind them. It’s important to consider the source of the information. As an example, news reports on a Legg Mason survey indicated that investors believe they need $2.5 million in retirement to enjoy their same quality of life. Legg Mason is a mutual fund company. Clearly, this information benefits their business.

The same goes for reports issued by Wall Street firms. Remember, Wall Street’s viability relies on investors. Because most of Wall Street is publicly traded, they need an ever increasing stream of investor assets for their share prices to rise. So, it has skin in the game.  And if you base how much money you need for retirement on Wall Street’s numbers, you may never feel you have enough.

Now that we’ve dispensed with Wall Street’s one-size-fits-all, huge nest egg approach to retirement, we can turn to the highly workable, highly individualized FTG strategy. Using FTG, will show you, on paper, that retirement could be well within reach.

So how exactly does the FTG strategy work? In essence, it focuses on covering expenses that your Social Security benefit, pension, and any other income streams won’t cover during retirement, i.e. “filling the gap.” The FTG strategy is a specific formula that first identifies your actual needs and lets you work backward from there.

To apply the FTG strategy to your specific financial picture, start by calculating your monthly retirement income. Add all your guaranteed and semi-guaranteed income streams — like pension payouts, Social Security benefits, veteran’s benefits, rental income, and part time work — together.  This number is your initial monthly income excluding your investment income from liquid assets (401ks, IRAs, brokerage accounts, etc.). Next, create a budget of your expenses to determine your monthly spending need. Once you’ve calculated all your expenses, subtract this number from this initial monthly income figure. This is your gap.

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