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….
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:
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.
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.
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.
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 June 24, 2024
Radon and Murs discuss the income needed during retirement. It’s important to understand that spending needs in retirement will differ significantly from your current earnings due to various factors such as taxes, savings, and job-related expenses.
Learn about a comprehensive approach to estimating retirement expenses by identifying costs that will decrease or disappear in retirement. You will also learn about expenses that will remain constant or increase during retirement and the importance of examining your current net income and expenses to understand your spending patterns better.
Today’s topic is something everyone who is thinking about or in the middle of retirement planning is concerned about: how much money do I need in retirement?
How do I figure out my income?
If you go online and use one of the calculators that claim to help you figure out the income you need in retirement, many will examine your current income and state that you need 80% – 90% of this figure in retirement.
For example, if you make $100,000 a year, the calculator will likely state that you need to have $80,000 in income each year in retirement.
We don’t like this approach because prior to retirement, you may be earning a high income, have heavy contributions to your 401(k), and other current expenses that you may not have in retirement.
Let’s dive into how we start to approach the income in retirement question.
What are Some Things That You Won’t Be Spending on in Retirement?
When you’re working, you’ll pay for a lot of things that you might not even realize that you won’t be paying for in retirement. A lot of these expenses will go down or be fully eliminated in retirement, starting with:
Commuting costs: Depending on where you live and go to work, you are spending time and money getting to and from work. Your commute costs will drop, which may mean gas, bus tickets, train tickets, parking, and other transportation expenses.
Attire: If you wear a uniform, suit, dress, or other work-specific clothing, you will not have the added cost of regularly buying and maintaining these clothes in retirement.
Professional development: If you take continuing education courses or pay to maintain licensing, these costs will also be lower or eliminated.
Food expenses: A lot of people go out for lunch because it’s easier to go to a restaurant or cafe than to make lunch at home. You may have a routine of going to a specific spot near your work to grab something to eat or drink before or after work. While $10 – $30 a few times a week or every day may not seem like much, it adds up quickly.
FICA Payroll taxes: You won’t need to pay FICA (Federal Insurance Contributions Act) payroll taxes, since they only apply to wages.
Child-related expenses: Kids will, hopefully, be out of your budget when you retire, too. Of course, there are some exceptions, but you likely won’t need to help pay for college or other expenses relating to raising your kids in retirement.
Travel: If you travel a lot for work, hotel, meals and transportation will go away.
Memberships: Any work-related memberships that you have you won’t need to pay for anymore.
Contributions: You won’t continue to add to 401(k) or IRA contributions. Some working folks are adding $30,000 to their 401(k) each year, which is a significant boost to their after-retirement income.
Any of the associated work expenses that you have will come off when you retire, which can dramatically decrease your expenses.
While not exhaustive, this list is a good starting point to think about things you are paying for as a working person that you may not need to pay for as a retired person.
How Much Money Do You Have Coming in Each Pay Period?
An easy way to start thinking about your income is to consider how much money you have coming in each pay period. If you have $8,000 coming in a month and can save $4,000, the rest of the money is for expenses.
But, what on the list that we just mentioned will you not be paying for any longer?
Some expenses on the list will still be there, even if they’re reduced, and we need to account for them.
You will still need to pay for:
Housing costs. Even if your home is paid off, you need to pay for things like property taxes and utilities. Our software will be able to account for mortgage payments that may only be there for a part of your retirement and will drop off.
Health insurance costs may change, and these costs may go down on Medicare. If your employer pays 100% of your healthcare costs, then your expenses may go up in retirement. You may even need to cover your own healthcare if you retire before 65, and all these expenses must be considered and accounted for to know how much money you really need in retirement. Shawn Southard, our Healthcare Professional Specializing in Medicare can help you find the best solution for your needs.
Many retirees have very busy schedules, filled with hobbies, events, and travel. You’ll likely need a car, so determining a budget for gas and car maintenance is important.
Insurance needs will vary, but you may need homeowner’s insurance, life insurance, long-term care insurance, and others.
FICA payroll taxes will be gone, but you’ll still need to pay Federal and State income taxes.
Hopefully, you’ll be at a place where you don’t have debt when you enter retirement. Debt and the high interest rates that come with it will impact your income.
Fun Stuff in Retirement
You’ve worked hard to reach retirement and you should plan to have some fun. A few expenses that you’ll need to consider are:
Travel costs
Date nights
Visiting family
Equipment and supplies for hobbies
Oftentimes, we can employ strategies to reduce income tax in retirement, and what helps with planning and strategy is knowing how you plan to spend your money in retirement.
Income matters. When you know what you’ll be spending, that’s when you can really see if you have enough in retirement to live the life you want.
When you’re working and earning a good income, you may not be overly concerned about swiping your credit card, and it can put you on autopilot because you know that you can pay for these expenses.
Once you understand your expenses and wants for the present and future, it puts things into perspective and gives you something to work towards.
We work with our clients to build a retirement-focused financial plan specific to their situation and goals. We build out the plan and provide ongoing communication to help you understand your expenses so that you can move closer to your retirement goals and what you want in retirement.
If you’re interested in having us create a retirement-focused financial plan for you, we would love to hear from you.
Get in touch with us and we’ll schedule a 15-minute consultation to discuss retirement with you.
