The Number You Don't Have

Where do I actually stand?

Ask someone approaching retirement what they have and you'll get an answer within about thirty seconds. Six hundred thousand. Nine hundred. One-point-two.

Ask what they spend and the room goes quiet.

That's backwards, and it's the single most common reason retirement plans fail quietly. Because the balance isn't what determines whether this works. Spending is. It's the denominator of every calculation that matters — how long the money lasts, when you can stop working, how large the gap is between what you're guaranteed and what you need. Get it wrong by twenty percent and every projection built on top of it is fiction.

So January is about establishing four numbers. Not budgeting. Not tracking receipts. Just knowing where you stand, honestly, before anyone starts making plans.

Number one: what you actually spend

Here's the good news — you don't need to build a budget or categorize a year of receipts. There's a faster method and it's more accurate, because it can't miss anything.

Work top-down. Take everything that came into your accounts last year — paychecks, Social Security, pension, withdrawals, everything. Subtract what you added to savings and investments. Subtract what you paid in taxes.

What's left, you spent. All of it. Including the things you'd never have written on a budget: the vet bill, the roof, the grandchild's wedding, the trip you'd forgotten about.

Do it for two or three years if you can. One year is a snapshot; three shows you the pattern, and it will almost certainly be higher than you'd have guessed.

Most people are off by ten to thirty percent, and they're off in the same direction. Nobody budgets for the transmission.

Number two: the split

Now divide that spending in two.

Essential is what you'd still be paying in a bad year. Housing, property taxes, insurance, utilities, food, healthcare, transportation, the tax bill.

Discretionary is everything you could cut without changing your life in a fundamental way. Travel, dining out, gifts, hobbies, the second car.

The honest test isn't "could I theoretically live without this." It's: if the market fell thirty percent next year, what would I actually stop doing? Be truthful. If you'd keep taking the annual trip with the grandchildren no matter what happened, that trip is essential. Calling it discretionary on paper doesn't make it discretionary in practice, and a plan built on a cut you'd never make isn't a plan.

That split matters more than almost anything else you'll do this year, because it determines how much of your retirement needs to be guaranteed versus how much can safely ride on markets.

Number three: what's actually guaranteed

Now list your income — but only the part that arrives every month for as long as you live, regardless of what markets do.

Social Security counts. It's for life, and it adjusts for inflation.

A pension counts — but check two things. Does it adjust for inflation? Most private pensions don't, which means it buys meaningfully less every year. And what does the survivor get? A single-life election that ends at death is a very different asset from one that continues.

Income from an annuity counts, if it's a lifetime payout.

What doesn't count: withdrawals from your portfolio. That's you taking your own money, and it can run out. Rental income doesn't count as guaranteed either — tenants leave, roofs fail, and someone has to manage it. Part-time work doesn't count, because health decides that, not you.

Number four: the coverage ratio

Now the number this whole year turns on.

Divide your guaranteed lifetime income by your essential expenses.

If Social Security and a pension bring in $52,000 and your essentials run $60,000, your coverage ratio is about 87%. Your bedrock costs are almost entirely covered by income that shows up no matter what the market does.

If guaranteed income is $34,000 against $68,000 of essentials, your ratio is 50%. Half of what you must pay depends on a portfolio that can fall thirty percent in a year that nobody predicts.

Those are two profoundly different retirements, and they can belong to households with identical account balances. That's the point. The balance doesn't tell you how much risk you're carrying. The coverage ratio does.

There's no universal right answer. But the ratio tells you which conversation you should be having:

High coverage — your essentials are handled. The portfolio exists for the good years, and a bad market is genuinely uncomfortable rather than dangerous. Your real question is probably whether you're spending too little.

Middle coverage — most households land here. The portfolio has a job it must perform. Sequence of returns matters enormously, and how you draw from it matters as much as what's in it.

Low coverage — your essentials are exposed to markets. This is where the year's work concentrates: closing the gap, deciding whether some of it should be made guaranteed, and being deliberate about the order you draw from things.

While the mail is arriving

One housekeeping item, since your tax documents are showing up this month.

Once your return is complete, pull five figures off it and write them down: your adjusted gross income, your taxable income, your total tax, your total IRA and pension distributions, and your Social Security — both the gross benefit and the taxable portion.

Those five feed the July projection and the August window. Divide total tax by taxable income and you have your effective rate, which is almost always startlingly lower than the bracket people quote at themselves.

And two things worth confirming with your preparer, because no form reports either: if you gave to charity directly from an IRA, it won't appear anywhere — you have to say so. And if you've ever made a nondeductible IRA contribution, that basis lives only on Form 8606, carried forward year to year. Change preparers and it can quietly vanish, and you'll pay tax twice on the same money.

What January is for

Four numbers: what you spend, what's essential, what's guaranteed, and the ratio between the last two.

That's it. No decisions this month. February asks whether it lasts, March turns it into a paycheck, and the rest of the year works on the gap.

But none of that means anything without the baseline. You cannot plan from a number you don't have.