Do I Have Enough For A Comfortable Retirement?
Great question, and one that we get a lot! Unfortunately, no universal “magic number” will apply to everyone. Since everyone has a different financial situation, lifestyle, health situation, and legacy plans, it would not be prudent for me to say that everyone needs $1,000,000, or $2,000,000, or perhaps more to live a financially worry-free and comfortable retirement. Some people can retire comfortably with a much smaller portfolio than someone with a higher portfolio balance. While there are some rules of thumb that you can apply to your situation, relying on these rules of thumb may not put you where you need to be to live comfortably in retirement. When we talk about retirement planning, we always say that lifestyle and cash flow are just as important as the size of the portfolio.
How much income will I need in retirement to live my desired lifestyle?
If you would like to travel the world and purchase a vacation home in retirement, your lifestyle will demand a higher amount of retirement income than someone who likes to stay close to home and live a life of leisure. Retirement planning is not a savings number but an income.
It is important to remember that your portfolio will not be the only source of income available to you in retirement. Many people tend not to factor in Social Security, pension income, or perhaps a period of semi-retirement income when they are planning for their retirement. These sources of income are critical because they can be applied to your lifestyle expenses, potentially reducing the amount you need to draw from your portfolio.
For example, let’s assume a 65-year-old newly retired individual has a lifestyle that calls for $5,000 per month in income. Let’s also believe that he/she will receive a monthly Social Security benefit of $1,500 and a monthly pension payment of $750. When we apply these income sources to their needs, we can determine that this retiree will fall short of their monthly income need by $2,750. To bridge the income gap, this retiree will need their portfolio to support a monthly withdrawal of $2,750. Suppose the 4% safe withdrawal rule is applied. In that case, which states that an individual can comfortably withdraw 4% of the total balance of their portfolio in the first year of retirement and adjust that amount for inflation every year after that without running the risk of running out of money over 30 years – we can calculate that this retiree will need a portfolio balance of $825,000 to support their retirement needs.
As we can see from the example above, planning for retirement is more about understanding your lifestyle, represented by your income need, instead of the amount you have saved in your portfolio. If you plan on retiring soon, you must begin to define your retirement lifestyle because that will drive the amount of income you will need.
