THE BLOG
11/04/2013 11:24 am ET Updated Jan 23, 2014

Retirement Planning for People Who Hate Math

You already know that it's very important to have a financial plan. But if you can't stand the thought of working with numbers you might be reluctant to put your strategy together. That's a quandary you don't want to be stuck in. The good news is that the solution is far simpler than you imagine.

You will have to work a few figures to map out your financial future but it is far easier and less complicated than you think. Let's get started.

1. Balance


Your financial past, present and future is determined by how you balance your savings, spending and income. Let's look at a few simple examples to illustrate.

Assume you are about to retire and you haven't saved a penny. You've figured out that it will cost you about $5,000 a month to live once you call it a day at work. But you have total retirement pensions of $6,000 a month coming in so you have nothing to worry about. Pass the wine cooler please.

Let's change the story a little to get more clarity. Using the example above, assume your pension is only going to be $1,500 a month. But you plan to work part-time and earn $1,500 a month and you have investments that can bring in more than $2,000 monthly. That totals more than $5,000 a month. So again, you basically have nothing to concerns.

The take-away is that retirement isn't just about how much you save. Look at how much you will spend in retirement, how much you'll have coming in and how much your investments can earn in order to have a design that works. This gives you a lot more flexibility as you'll see in just a minute.

2. Budget


If retirement is about balancing your spending, savings and income, you need to know approximately what these numbers are going to look like when you retire. It's easy to get a sense of what your pension income is going to be and we'll talk about investments in a minute. For now, let's look at spending -- everyone's favorite subject.

Knowing what it costs you to live is your most important number. Everything else flows from this. Your spending determines how long you have to work for, how you will live, when you can retire and how you invest. Pretty important... right?

Now, the good news is, you don't have to become a nerd just to get your fingers on the pulse of your spending. Of course you can create a complicated spreadsheet or buy budgeting software but you don't have to. You can actually track your spending in under five minutes a month.  That's because the bank does all the work for you for free every month. That's right. If you look at your bank statement, it tells you the total amount you withdrew from your account each month. This is the amount you spent each month. If you paid your credit cards and made ATM withdrawals from that checking account those figures are already included in your total withdrawal number so your job is a snap.

If you want to know what it costs you to live on average each month, just track those total withdrawals every month and you'll have your answer. Granted, when you retire your financial situation might be a little different.  You might move to a less expensive city or home once you retire.  Other variables will shift.  That's fine.  Don't let the unknowns stand in your way.

You can always tweak the number. But this is a great starting point for anyone who needs to know what it costs them to live but who doesn't want to track how they spend every last dime.

3. Savings


At this point, we've determined what it costs you to live and we know what your retirement income is going to be. Now let's see how much your investments can contribute to your retirement life.

Let's assume you will have about $450,000 in a 401k on the day you retire. The account is invested in a balanced portfolio and you will need to pull out some income from the account. Since the returns vary from year-to-year you are at a loss to figure out how to turn that 401k into an income generator. No problemo.

The trick here is to remember that your investments are long-term. If you have a balanced portfolio, think of the returns over the long-term rather than the year-by-year results. This is very important -- and it will help you a great deal. In any one year, your investment returns might be all over the board. But if you look at your investment performance over many years, it's safer to make your plans.

If you do think about your investments from a long-term perspective, you should have no problem withdrawing 4 percent from these investments and even giving yourself an annual inflation raise too. Of course there will be some years where you don't earn 4 percent. You could earn less or even lose money. But there will be other years where your investments earn much more. Over the long-term, this balances out.

If this is your approach, your chances are very high that you can go to your investment well for at least 30 years and never run out of money. Investor"s Business Daily recently referenced numerous studies that indicate how successful this strategy can be.

Creating a retirement plan might seem intimidating but it doesn't have to be. Figure out what it costs you to live now and make adjustments for what your life is going to look like once you retire. Add up all your pension income sources and calculate what you can safely withdraw from your retirement accounts.

Because your retirement is really based on all three pillars -- spending, income and investments -- you can change the variables if the numbers don't work. In other words, if you see that you won't have enough income to support your retirement, consider working longer, spending less, changing your investment strategy or a combination of all three.

You can only make those kinds of plans once you know where you stand. As you can see, it will require a little bit of math but it's not all that complicated.

Have you run your retirement plan? Did you change anything about your financial behavior as a result? Please leave a comment below. I look forward to hearing from you.

Neal Frankle is a CFP (R) in Los Angeles.  He is the owner of Wealth Pilgrim and co-owner of MCMHA.org.