November 18, 2024 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for November 18, 2024

How Much Money Do I Need Saved to Spend 10,000 Per Month in Retirement?

Radon and Murs discuss the question many retirees and pre-retirees ask: “How much money do I need saved to spend $10,000 per month in retirement?” This is a highly specific question that requires a tailored approach to retirement planning. Radon and Murs reverse engineer this scenario…

 

How Much Money Do I Need Saved to Spend 10,000 Per Month in Retirement?

Retirement is something many of us dream about after years of hard work and diligent saving. One of the biggest questions that might come to mind as retirement approaches is, “How much do I really need to save to enjoy the lifestyle I want?” Specifically, you might be wondering how much money you’d need in savings and investments to spend $10,000 per month in retirement….

How Much Money Do I Need Saved to Spend $10,000 Per Month in Retirement?

Retirement is something many of us dream about after years of hard work and diligent saving. One of the biggest questions that might come to mind as retirement approaches is, “How much do I really need to save to enjoy the lifestyle I want?” Specifically, you might be wondering how much money you’d need in savings and investments to spend $10,000 per month in retirement.

We’re here to help answer that question by breaking down the numbers, exploring different planning strategies, and addressing key factors that could affect your savings goal. From Social Security to inflation, sequence of returns risk, and more, we’ll guide you through the considerations to help you build a reliable retirement income. By the end of this blog, you’ll have a clearer picture of the steps needed to secure your retirement and achieve peace of mind.

Understanding Your Spending Needs

The first step is to determine your retirement spending goals. Let’s say you’ve worked hard, saved consistently, and want to spend $10,000 monthly in retirement. To achieve this goal, you’ll need to factor in Social Security, other income sources, and your savings strategy. For example, if Social Security benefits cover $6,000 of that total, you’ll need to find a way to generate the remaining $4,000 monthly. This is where personalized retirement planning becomes essential.

How Much Do You Need to Save?

To figure out how much to save, we can apply the 4% rule for retirement. This rule suggests that retirees can withdraw 4% of their retirement portfolio per year without depleting their savings over a 30-year retirement. It’s a good starting point, though not a one-size-fits-all solution.

Based on this rule; to generate $48,000 annually ($4,000 per month) after Social Security, you would need a retirement portfolio of roughly $1.2 million. This calculation assumes a 4% withdrawal rate. However, due to factors like market volatility and inflation, some experts recommend using a more conservative withdrawal rate, like 3% or 3.5%, which would increase the savings requirement to around $1.4 million.

Factors that Impact Your Monthly Budget

When planning to spend $10,000 per month in retirement, consider how factors like taxes, inflation, and market volatility will affect your financial security. Here’s a closer look at each:

  1. Taxes: Whether you aim for a gross or net $10,000 can significantly impact your strategy. Funds from sources like a traditional IRA are taxed as ordinary income, while long-term capital gains from brokerage accounts might be taxed at a lower rate. Roth IRA distributions, on the other hand, can be tax-free, making your tax plan a key element in reaching your monthly income goal.
  2. Inflation: Inflation gradually erodes purchasing power, making it essential to account for it in your retirement plan. A 3% annual inflation rate, based on a historical average, is typically used to project future expenses. This means that the $10,000 you aim to spend today will need to grow over time to maintain the same lifestyle. Personalized retirement planning can help you adjust for inflation and avoid underestimating your income needs.
  3. Market Volatility and Sequence of Returns Risk: Market volatility can have a lasting impact, especially early in retirement. When you retire, a market downturn can reduce your portfolio’s value and make it challenging to sustain your desired income without overspending. This risk, known as sequence of returns risk, is why some retirees use a diversified approach to protect their income, such as combining “growth” and “safety” buckets.

Mitigating Sequence of Returns Risk

Sequence of returns risk refers to the potential loss of funds due to withdrawals during a market downturn, especially early in retirement. Imagine you’ve saved $1 million and are withdrawing 4% each year. If the market declines by 20% shortly after you retire, the impact could be lasting, as you’re drawing from a declining balance without time for recovery.

One effective way to combat this is through a two-bucket approach: a growth bucket and a safety bucket.

  • The growth bucket contains market-exposed investments that grow over time but come with some risk. This bucket can yield higher returns but should be left untouched during market downturns.
  • The safety bucket is for short-term needs, holding principal-protected assets that grow steadily. By drawing from this bucket during market lows, you avoid selling assets at a loss, preserving your growth bucket’s potential.

Balancing Your Retirement Goals with Lifestyle Needs

Personalized retirement planning isn’t solely about math. It’s also about aligning your savings strategy with your desired lifestyle. For instance, if you want to travel extensively in the first decade of retirement, you might initially need a higher budget. Many retirees anticipate a decrease in spending as they age, assuming they’ll eventually travel less. Adjusting your spending expectations over time can be a valuable approach to retiring comfortably.

Creating Your Peace of Mind Pathway

Retirement planning involves more than setting a savings goal. It’s a retirement checklist that includes investment planning, tax planning, and estate considerations. With a comprehensive and structured approach, you can optimize each part of your retirement to secure your peace of mind. Our Peace of Mind Pathway simplifies retirement planning into clear, actionable steps, allowing you to focus on your priorities, like family, travel, and personal goals. This pathway considers:

  • Investment Planning: Ensuring a well-diversified portfolio to balance risk and growth.
  • Tax Planning: Creating tax-efficient withdrawal strategies to minimize liabilities.
  • Healthcare Planning: Addressing potential medical costs and insurance needs.
  • Estate Planning: Protecting your legacy and ensuring your assets are distributed according to your wishes.

When to Start Thinking About Retirement

If you’re wondering, “Is it time to retire?” or “When should I retire?”, a good starting point is an analysis of your financial readiness, lifestyle goals, and health. Retirement planning is a personal journey, and having a strategy that adapts to your needs is vital to secure your retirement.

The Role of Professional Guidance

Every retiree’s situation is unique, which is why personalized retirement planning is essential. There’s no universal answer to questions like “What is the 4% rule of retirement?” or “How do I manage budgeting on social security?” Consulting a professional to help analyze your expenses, determine optimal withdrawal rates, and implement strategies to address risks like inflation and market downturns is a good start for many in retirement planning.

If you have some questions about how this may fit your situation, schedule a 15 min call with us on our website. If we can’t answer all your questions in just 15 minutes, we’ll guide you to the next steps to find the answers you need.

July 3, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

This Week’s Podcast – You Have Enough to Retire, but How Do You Create an Income.

Listen in to learn the importance of starting a withdrawal strategy in the first few years of retirement to avoid a sequence of return risks. You will also learn about all the things you should be thinking about if you want to retire early or at any age to keep your life fun and exciting in retirement.

What’s the importance of having a financial professional to help you with the withdrawal strategy to avoid the stress of the deaccumulation phase? Learn here…

 

This Week’s Blog – You Have Enough to Retire, but How Do You Create an Income.

In this scenario, the couple wants to retire at 55 – one year from now. They want to know the best way to take their distributions. The couple plans not to touch the qualified money until they hit age 59.5.

They go on to say that they understand the 4% rule, but they don’t…

You Have Enough to Retire, but How Do You Create an Income?

An article came across our desk from MarketWatch about a couple in their 50s who want to retire early. They have $4.5 million in savings and don’t know what to do to withdraw the money in retirement

Breaking down the couple’s assets, they have:

  • $2.3 million in taxable accounts
  • $2.2 million in retirement assets

The couple has the assets to retire, but this article resonates strongly with us at Peace of Mind Wealth Management. How do you build a plan that will last 20 – 30 years and take care of your family?

The article’s response was pretty standard: seek professional advice instead of trying to do it yourself because everyone and their circumstances are different.

With that setup, let’s dive into the meat of the topic and explain how we recommend you create an income stream.

What the Couple Lets Us Know About Their Situation and Ideas

First, the couple wants to retire at 55 – one year from now. They want to know the best way to take their distributions. The couple plans not to touch the qualified money until they hit age 59.5.

They go on to say that they understand the 4% rule, but they don’t know whether to take money monthly, quarterly, or annually. The couple planned to take money off the table after the 2021 peak, but waited until 2022 for tax purposes, and that backfired.

They also want to know how often they should withdraw money from their accounts.

From our perspective, we love the idea of a retirement focused financial plan. As you grow up you are told to save. Save as much as you can, and dump the money into 401(k), IRA, life insurance, brokerage accounts, emergency funds, and so much more.

Suddenly, you’ll exit the accumulation phase of life and need to enter the distribution phase.

The money you’ve built up needs to last the rest of your lifetime. This is where the anxiety phase seems to kick in:

  • Did I save enough?
  • Did I plan enough?
  • Do I have enough money to last the rest of my life?

We see clients that have less than $4.5 million for retirement and some with substantially more.

How Do You Start Withdrawing?

Based on the article, we know that the individual who wrote into MarketWatch understands the 4% rule. This rule is simple: if you withdraw 4% of your assets annually, you should maintain your assets throughout retirement.

Let’s say that you have $1 million in an account and take $40,000 out of the account annually. In a “predictable” market, this means you’ll replenish the money you take out each year.

We saw in 2022 that the market fell 20% – 30%, depending on the index. In 2020, the market fell over 30% in just a few weeks.

Markets are not predictable. Every few years, we do see volatility and corrections.

While the 4% rule is slightly off and is more like 3.3%, meaning for every $1 million you have in retirement accounts, you can confidently take out $33,000. Rates of returns have gone down, and inflation has gone up.

The times when 7% – 10% gains were almost certain in the markets are, in our opinion, not in our future. You’ll have years of gains in this range or higher, but on average, the market fluctuates too much for it to be predictable.

Based on this information, you should speak to a financial professional and look at all the pieces of retirement and how they fit together.

The person who responded to the question mentioned something else that was important: sequence of returns risk.

What is Sequence of Returns Risk?

If you start your retirement in a down scenario, your return risk goes up. For example, if you wanted to retire in January 2022 and wanted to withdraw $5,000 a month for retirement, it was a bad time.

The markets went on a steady 12-month decline with no recovery phases in the middle.

A person may have had $1 million at the start of the year, but when the year experiences a downturn like 2022, the $5,000 you take out is turning into a higher percentage of your portfolio.

The portfolio stress becomes higher when you withdraw on a down asset.

If the first early years were down 10% or 20%, you could get into a very tricky situation where you might receive 7% returns a year now. However, those initial down years really hurt your chances of the account lasting through retirement.

For us, it makes more sense to consider where you’re withdrawing the money and think about withdrawing money from accounts with less risk.

You may even need to adjust the number of withdrawals you have during down years.

Gap Between the 55 and 59.5 and Funding Retirement

Since the person is retiring before 59.5, they do risk being penalized if they touch their retirement accounts before the age of 59.5. The person writing in understood this fact, but they will need to fund retirement for 4.5 years in some other way.

You can tap into your non-retirement accounts, and there are strategies to tap into a 401(k) at age 55.

The other thing to identify if you’re retiring early is:

  • How much do you need to spend every month? These are “needs”, including food, utilities, mortgage and so on.
  • How much do you want to spend every month? “Wants” include things like vacations, visiting grandkids and so on.

We also need to think about pensions and any income that may be coming in that is not tied to your retirement account. Since the person is 55, we’re not considering Social Security. Early retirement age means thinking about heightened health insurance costs of around 10 years until the person reaches age 65.

When retiring at 55, the person also has opportunities to understand where to withdraw money from to make their money last.

Between the age of 55 and 75, when the person needs to take required minimum distributions, they have 20 years where they can do some pretty cool stuff. For example, they can:

  • Convert pretax to tax-free accounts
  • Reduce taxes through conversions

If the person has all their money in a traditional 401(k), they can start converting these assets through Roth conversions over these years. The ability to grow assets tax-free is a beautiful concept.

We recommend the person spend time understanding where money is coming in, where money is going out, and when various milestones in retirement will be hit.

A person can begin taking Social Security early, at retirement age or at age 70. The additional income may help pad their income needs later in retirement.

Medicare also needs to be considered and is a massive topic because of IRMAA, or surcharges for making too much money in retirement. You may take out more money from one account, but you’ll be penalized in some way:

  • Tax bracket change
  • Taxable Social Security
  • Medicare surcharges

When it comes to a withdrawal strategy, we follow a bucket approach that follows a “why” scenario for spending by breaking your money into:

  • Cash
  • Safety
  • Growth

Bank money and emergency funds are cash. This money is easy to access and will not impact retirement. Safety buckets speak to the idea of the safety of return risks. If we have a safety bucket with low risk and make a return, it brings predictability to our plan.

Finally, the growth bucket is the long-term bucket that is in the stock market and will go through ups and downs. If we can avoid tapping into this bucket, it will be allowed to grow long-term and can circumvent volatility because you don’t need to take money out of the account during down periods.

You can tap into the growth bucket when you need it for things like a vacation. It is a liquid bucket but allowing it to grow over time makes sense for our clients.

We aim to create a withdrawal strategy that minimizes risks and allows you to live comfortably through retirement. Everyone’s retirement plays out differently because your needs are unique and will change over time.

Working with someone who lives and breathes retirement strategies can help you create a withdrawal plan that minimizes risks and tax burdens, and considers volatility in ways that “general” rules, like the 4% rule, do not.

Do you have questions about retirement and want to speak to a professional?

Click here to schedule a 15-minute call with us today to discuss your retirement concerns.