“How much do I need to retire?”
It is probably the most common question we get asked as advisors, but the problem is, a lot of what you read is misleading or irrelevant to your actual situation.
So, In this video – John Conley and Adam Blye break down how “realistic” the current figures the industry tells us are; and how much you actually need to retire – using real numbers.
Debunking the Retirement Rules of Thumb
Let’s look at some of the common metrics used in the industry and why we believe they can lead you astray:
The Pacing Angle: A Multiple of Your Annual Income. This rule suggests saving 10 to 12 times your final salary by retirement.
For example, if you make $100,000 a year, the target would be $1.2 million. While saving for retirement is undoubtedly important, this arbitrary 10-12x rule lacks value because it doesn’t consider your individual circumstances, spending needs, or potential market fluctuations.
It’s like saying everyone should wear a medium shirt – it simply doesn’t fit everyone’s needs.
Furthermore, telling a 30-year-old earning $100,000 that they’re already “behind” for not having a million dollars can be incredibly discouraging. While the idea of setting aside money early is sound, this rigid pacing strategy isn’t the most effective.
The Seamless Transition: The 80% Income and 4% Withdrawal Rule.
This rule suggests that needing 80% of your pre-retirement income and withdrawing 4% annually over 25 years will ensure a successful retirement.
While the 4% rule has been a long-standing guideline, it’s considered simplistic and doesn’t adequately account for market volatility, your specific spending requirements, or the sequence of investment returns.
While a “safe withdrawal number” is a valuable concept, a fixed 4% might not be suitable for everyone.
We believe in looking at your individual situation to determine a personalized safe withdrawal number to support your desired lifestyle without the fear of running out of money.
Retirement spending isn’t static; it fluctuates with things like grocery bills and unexpected expenses like a new boiler. A rigid percentage doesn’t allow for this flexibility.
Joining the Club: The Arbitrary Million-Dollar Target. You’ve likely seen articles stating that Americans believe they need a specific amount to be financially free, like the $1.46 million figure we saw.
The problem with this “join the club” mentality is that it creates a shortfall mentality. If you haven’t reached that arbitrary number, you might feel like retirement is unattainable.
However, this figure doesn’t consider your individual expenses or income sources.
Focusing on What Truly Matters: Your Portfolio Income Needs
So, if these rules of thumb are flawed, what’s a better way to plan for retirement?
The key metric is understanding your portfolio income needs. This involves a more personalized approach:
Envision Your Retirement Lifestyle: What do you see yourself doing in retirement? Do you plan to travel, pursue hobbies, or perhaps spend winters in a warmer climate?. Understanding your desired lifestyle helps identify potential added expenses.
Calculate Your Retirement Expenses: This includes not only essential expenses like utilities and housing, but also the lifestyle expenses that make retirement enjoyable, such as dining out and travel.
Interestingly, people often spend more on these discretionary items in the early years of retirement.
Determine Your Guaranteed Income: What income sources will you have, such as Social Security and pensions?.
Develop an Income Strategy for Your Portfolio: Once you know your guaranteed income and estimated expenses, you can determine how much income you’ll need to draw from your investment portfolio.
This involves creating a tax-efficient strategy to generate the necessary income to support your desired lifestyle.
The most important factor isn’t just how much you’ve saved, but what you need to spend in retirement.
Many people might be closer to retirement than they think, even if they haven’t hit a seemingly arbitrary savings target.
We recently worked with clients who had around $800,000 saved and felt they were far from their $1.3 million goal. By analyzing their situation, including optimizing their 401k contributions, considering tax-efficient rollovers, and factoring in the eventual payoff of their mortgage and reduced expenses from children leaving college, we were able to show them that they were much further along their retirement journey than they realized and could potentially retire sooner.
Don’t let misleading figures keep you working longer than necessary and potentially missing out on valuable healthy years in retirement.
The average healthy life expectancy in the United States can be around age 65.
Retirement is evolving. Some individuals may choose to transition gradually by becoming consultants or working part-time, which can supplement their income and reduce the need to draw as much from their portfolio in the early years.
Ready to Discover Your Real Retirement Number?
It’s time to move beyond generic advice and focus on your unique financial picture. Understanding your personal retirement income needs is the crucial first step towards a confident and fulfilling retirement.
Click here to access our questionnaire. By sharing your situation with us, you’ll receive a personalized video from one of our partners at Rubino and Liang Wealth Partners to discuss your specific needs and help you on your path to a successful retirement.
Don’t let retirement myths hold you back. Let’s work together to define your reality.
