When Will I Be Retirement Ready?

Financial Planning When Will I Be Retirement Ready?

We toil our whole careers to invest for the ‘future.’ For most of us, that is a 401k or IRA, along with other supporting investments and policies. But how do we know when we have enough? Given it’s National Save for Retirement Week, there’s no better time than now to take the mystery out of saving for retirement.

One strategy is to view your retirement vehicles through the Earn-to-Burn Ratio. Simply put: Your Earn-Rate (your income without you working) minus your Burn-Rate (what it costs to be you) equals either a positive or negative number. If your Earn-Rate exceeds your Burn Rate, you are free and financially independent. If it does not, you will have to downsize and/or keep working.

Here’s how it works.


It begins with assessing your ‘Burn-Rate’. How much money do you ‘burn through’ on an annual basis? Put another way, how much does it really cost to be you?

Consider this:

  • Most Americans think they know how much they make and spend each month, but a recent study says they are wrong on both accounts.
  • Only 32% of Americans make a budget.
  • When it comes to planning, only 30% of Americans plan for long-term goals such as saving and investment.

Knowing what you spend can be easy. Personal finance apps like Mint help consumers understand what it costs to be them and provides a look at historical spending.

Once you’ve obtained your ‘Burn Rate,’ it’s time to take a look at your ‘Earn-Rate.’


To determine your ‘Earn-Rate,’ estimate your income after you stop working. Total the cash flow from all of your income producing assets:

  • A business
  • Income producing real estate (not your house unless you rent it to others)
  • Wall Street (stocks, bonds, mutual funds, usually in your 401k or IRA)
  • Policies (a pension, Social Security, annuities)

Most of this is straightforward once you plug in the age you want to begin to draw on them with the exception of the money you have in the stock market.

The stock market and your portfolio obviously have no guarantees. If you are conservatively invested and diversified, you can look to the averages. But how much will those investments grow over time? You hear a lot of opinions on this, and my advice is that you must be conservative. I would rather guess low vs. high. Some quote numbers like 10 percent (Large Caps) or 12 percent (Small Caps) over a long period, say (1926-2014). If you have a long horizon until you retire, you can ride out the markets inevitable ups and downs. Again, it is prudent to remove the rose-colored glasses and make sure you estimate more conservative, say 8 percent.

How much can you withdraw annually without running out of money? Turning to experts, the consensus seems to be 4-5%. That way, your portfolio grows more than the rate you tap into it for retirement income.

The Calculation

The total Earn-Rate minus Burn-Rate reveals where your money stands. If the number is positive, your ‘Earn-Rate’ exceeds your ‘Burn-Rate’. You are financially independent. If not, make adjustments now (invest more, spend less, cut debt) and then re-run the numbers.

The objective is that when you arrive at the golden years and find that they are truly golden. It’s called ‘Financial Freedom.’

And it’s easier to get there with a little planning… even in your 20s.

Alan J. McMillan is the founder of LearnEarnRetire, an organization that coaches 18-24 year olds by assisting them in the transitions from Campus to Career to Financial Independence over time.  He speaks annually to thousands of students at campuses like MIT, Howard, Syracuse, Spelman, Ohio State and Virginia Tech.  He also sits on the faculty at Ohio University in Athens, Ohio.

Comments (2) Leave your comment

  1. Alan, loved the article but moreso love your passion for taking with those about ready to go out into the real world. So many are unprepared or already in debt when they graduate. I share that passion as well and was wondering how you got connected to Universities.

  2. Alan, great article. I like the idea of a total burn rate, rather than “monthly spending” which could leave some things out. Rather than a ratio, which it is not, I’d call it the earn to burn balance.

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