08/01/2014 04:48 pm ET Updated Oct 01, 2014

You Need Less Than You Think to Retire

Financial experts near and far suggest that you'll need millions in order to even dream of retiring one day. Phooey. With proper planning, some flexibility, and a little of out-of-the-box thinking you can easily retire with far less than you think.

The Approach
Successful retirement requires a balance of income, assets and spending. Use that balance to create a financial future you don't have to worry about. Let's break this down and look at each component one step at a time.

You can't know exactly what it's going to cost you to live when you retire but you can estimate and work around that. Let's say you currently spend $75,000 a year to live. Once you retire your expenses could be far lower than you think. Here's why:

  • You won't need to save for retirement any more.
  • You'll likely have fewer people to support.
  • Your tax bracket will likely be lower.
  • Your mortgage could be paid off.

Indeed, estimates that retirees need only 50 percent of what they earned while working. If that's true, and you need $75,000 now, you'll only need to replace $37,500 when you retire (adjusted for inflation). That's good news. And it gets better.

You might not realize it, but your savings and other assets can generate more income than you think. Many investors think they have to reposition their assets into fixed income, CDs or income annuities when they retire. That's because they want a steady income they can rely on. And because they are focused on income generating assets, they shy away from equity funds. That's because they are volatile and many don't pay much of a dividend. Their thinking makes sense on one level. But sticking with fixed income investments and excluding all other alternatives could be an expensive oversight.

Fixed income and CD rates are extremely low right now and they could stay that way for a long time. That means even if investors put a huge amount into these low-paying fixed income options, they'll still get a paltry cash flow.

On the other hand, there are many ways to squeeze a very juicy withdrawal rate of 3 percent to 4 percent out of growth or balanced funds and rental real estate. And unlike fixed income, equity funds and property provide an opportunity for equity and income growth. That translates into a potential income stream that grows over time to keep pace with inflation. Bottom line? If you are willing to reposition your retirement assets to enhance your cash flow, you'll probably have more income than you otherwise thought.

Let's go back to our illustration. You currently spend $75,000 a year. You might need less than $40,000 in today's dollars when you retire. If you have $350,000 saved now between your retirement accounts and other investments, that could easily generate $14,000 a year. Now you are only $26,000 in the red. Let's keep going.

Rounding out the triangle that supports your financial future is income. You may not have a pension to look forward to but Social Security income is something you should take into account. It's easy to get an estimate of your future Social Security benefits. According to the Social Security Administration, the average retirement benefit is $1294 a month.

So if you are married, you and your spouse could easily pull down over $30,000 a year in benefits from SSI. That gives you a hedge for taxes and puts you in fairly good shape.

If you got through this exercise and still come up short, you still don't have to panic. You can consider working longer, working part-time once you retire or reducing your spending. In any event, after you consider your retirement needs and resources this way, you'll probably conclude that retirement peace of mind is easier to obtain than you thought.

Of course in order to really button this retirement income issue up, you should run a detailed financial plan (which you can do yourself for free). But you get the idea. Given once you retire, you will likely spend less than you currently do, that you can create more income from your investments and your income might be greater than you think, you really may not have the retirement worries you think you do.

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