Assessing Your Starting Point

Step 1: Calculate Your True Income Needs

Forget the "80% of pre-retirement income" rule. You need to build a real budget based on actual expenses, not arbitrary percentages.

Monthly Fixed Expenses

Start with the non-negotiables:

• Housing: Mortgage/rent, property taxes, insurance, HOA fees
• Healthcare: Medicare premiums (Part B, D, supplemental), out-of-pocket maximums
• Utilities: Electric, gas, water, internet, phone
• Insurance: Auto, life, umbrella policies
• Debt Service: Car loans, credit cards (ideally $0 by retirement)

Variable Expenses

Then estimate the discretionary spending:

• Food: Groceries and dining out
• Transportation: Gas, maintenance, registration
• Entertainment: Travel, hobbies, subscriptions
• Gifts & Charity: Family, holidays, donations

The Inflation Buffer

Add 20% to your calculated expenses. Why? Because retirement spending isn't linear. You'll spend more in the early "go-go years" (60-70) on travel and activities, then taper down in the "slow-go years" (70-80), and spike again in the "no-go years" (80+) due to healthcare.

Step 2: Inventory Your Accounts

List every retirement account you own and categorize by tax treatment. This matters for withdrawal strategy later.

Tax-Deferred Accounts (Pre-Tax)

• Traditional 401(k): $_____ (taxed as ordinary income on withdrawal)
• Traditional IRA: $_____ (taxed as ordinary income on withdrawal)
• SEP IRA / SIMPLE IRA: $_____ (taxed as ordinary income on withdrawal)

Key Rule: Required Minimum Distributions (RMDs) start at age 73 (as of 2024).

Tax-Free Accounts

• Roth 401(k): $_____ (tax-free withdrawals after 59.5)
• Roth IRA: $_____ (tax-free withdrawals, no RMDs)
• HSA: $_____ (triple tax-advantaged, use for healthcare first)

Taxable Brokerage Accounts

• Individual/Joint Brokerage: $_____ (taxed on realized gains + dividends)
• Cost Basis: $_____ (know this for tax-loss harvesting opportunities)

Step 3: Calculate Your Income Gap

Now compare what you need vs. what you're currently producing in dividend income.

The Gap Formula

Sizing the Portfolio You Need

If your gap is $3,000/month ($36,000/year), how much capital do you need?

• At 4% yield (conservative Tier 2-3 mix): $900,000
• At 6% yield (balanced Tier 3-4 mix): $600,000
• At 8% yield (aggressive Tier 4-5 mix): $450,000

Step 4: Risk Assessment

Assess your true risk tolerance. This is NOT a questionnaire score - it's a hard look at how much volatility you can stomach.

Critical Questions

1. Can you afford a 30% portfolio drawdown? If your $500K drops to $350K in a crash, do you have enough cushion to not panic-sell?
2. How stable is your dividend income? If half your holdings are T4-T5, your monthly checks will swing wildly.
3. What's your re-employment risk? If you retire at 60 and run out of money at 70, can you go back to work?
4. Do you have an emergency fund? You need 12-24 months in cash before you even think about living off dividends.

Action Items

Next Steps

Once you've calculated your gap and inventoried your accounts, you're ready to build your income base. Module 2 covers the strategic shift from growth to income.