Retirement income involves thinking about the amount of money that you need for expenses and determining the source of these funds. The key difference between where you get your cash in retirement years versus working years is that you’ll no longer receive a paycheck in retirement, and you’ll need to replace that income from investments and other sources.
If you haven’t yet estimated your monthly retirement expenses, please see our blog on retirement expenses. For this cash flow discussion, let’s assume you need $8,000 per month, or $96,000 per year, to cover your fixed and discretionary expenses.
Where will you get these funds? For many of us, there are two obvious places to get at least a portion of this money. One is from our investments, and the other is from Social Security. Assume for this exercise that Social Security will pay you and your spouse $3,500 per month. So, $8,000 minus $3,500 leaves $4,500.
In this simple example, the $4,500 will come from your investments. Many advisors feel that it is safe to withdraw 3.5% per year from your investments, assuming typical inflation and your life-expectancy. The calculation for this couple is then ($4,500 x 12 months)/3.5%, or approximately $1.5 million in investments.
For many people, this level of savings is breathtaking. But let’s break it down just a bit and see if it seems more realistic. Many of us have a defined benefit or pension plan from our employer. We also might have IRA and 401(k) or similar retirement savings plans. Suppose these pension and retirement savings plans add up to $800,000. That means we also need personal investments (mutual funds, etc.) worth about $700,000.
If these levels of savings are not realistic for your situation, you still have options. You might consider working a little longer. This gives you more time to add to your savings and also decreases the number of years that your investments need to support you. Similarly, some people continue working part-time to help with cash flow. There are other options too, such as rental properties and so forth. It also may be wise to have your financial advisor double-check your expense estimates –- particularly the tax estimates. Improved expense estimates could hopefully reassure you that your retirement savings are adequate to fund your expenses.
Beyond this high-level analysis, there are other important considerations, such as tax efficiency and required minimum distribution rules. If all of this sounds a bit overwhelming, don’t worry, Guidepost Financial Planning and other advisors can help you analyze your cash flow requirements. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.