How Much Income Do You Want from Your Portfolio in Retirement?
Thursday, August 4, 2016
Most people say that they want to have a comfortable life and do what they want during retirement, without running out of money. Some people want enough retirement income to do things that they couldn’t do during their career: travel extensively or make a major purchase like a boat or vacation home to share with family. But despite being able to articulate what they want during retirement, plenty of people don’t know how much income that will take—and whether or not their portfolio can support it.
Figuring out how much income you need during retirement should be a high priority, no matter how many years away it is. Putting a number to your vision can help you understand that you may need to make adjustments in your investment strategy now to accomplish your goals. Or, if retirement is right around the corner, that you need to adjust your goals to accommodate your income reality.
Let’s look at a simple, but effective, way to give you a ballpark figure for how much you’ll need in retirement assets to have the income you hope for.
First, figure out about how much you’ll be spending, either monthly or annually. Start with a budget that covers all of your essential expenses and build it out to include healthcare expenses, and the things you would like to spend money on, such as those trips to Europe.
If you use your current budget, remember to deduct any money you’re saving each month, payroll taxes, and any savings you might enjoy by moving into a smaller or less expensive home. If you have commuting expenses or spend significantly on a workplace wardrobe, you can deduct those as well. If you have children that you’ll no longer be supporting, you can deduct associated expenses. These adjustments could reduce your cost of living expenses by 30% or more, depending on your lifestyle.
In general, financial experts estimate that the average person needs about 75 – 80% of their preretirement income to sustain their current lifestyle after retirement.
Now let’s figure how much you’ll likely have for income:
· Add up any retirement income you’ll receive on a regular basis from Social Security, a pension, rents or royalties, and any other recurring income.
· Subtract your expenses from your income. If the result is zero or positive, you’re in good shape. If you have a negative number, you’ll need to make some adjustments to either our income potential or your expense expectations.
· Now figure the annual difference between your income and your expense by multiplying your monthly figure by 12 (if you did it that way). This is your annual gap.
· Multiply your annual gap by 25. That gives you the amount of savings you need so you can withdraw the recommended 4% annually.
Here’s an example: let’s say your post-retirement monthly expenses add up to $5000. If your monthly income is $3000, your annual gap is $2000 x 12 = $24,000. Multiplying that by 25 gives us $600,000, the amount you’ll need in your individual retirement account, 401(k), or other savings vehicle-- before taxes.
At Retirement is about Income, we specialize in smart retirement plans--ones that can guarantee growth and lifetime income, potentially, throwing off more income with less savings. If you’re interested in learning more about how to retire smart, give our office a call today. There is never a charge for consultations or advice.