Trying to figure out how much money that you will need in your retirement years is a complex endeavor. There are so many variables and unknowns that have to be accounted for in order to get a somewhat accurate estimate. Even with accurate inputs, these calculations need to be reevaluated often to account for tax code changes, lifestyle changes, and actual investment returns, just to name a few of those variables.
The one that I wanted to focus on today is the withdrawal rate of your retirement accounts. That is, how much will you need to take out of your IRA, 401k, etc., to live the life that you desire during retirement.
The most common method is to figure out what your expected monthly expenses will be and then determine if you’ll have enough in your accounts to cover those expenses for the rest of your life.
For example, if you expect to need $6,000 per month in retirement over the next 30 years, you’ll need a about $1,300,000 to start with in your retirement savings. This accounts for everything, including all the fun that you’re going to have: trips, vacations, etc.
What most people, and their advisers, don’t account for is their activity levels throughout retirement. That’s why I feel this method for calculating your “number” is kind of misleading.
Using the same example, you might only need that $6,000 monthly amount for, say, the first 15 years of retirement. Then, after all that partying, you might want to take it down a notch. So, let’s make it $4,000 per month that you’ll need for the remainder of your retirement years. It turns out in this scenario, that you’ll only need about $1,080,000 to start with, or about $220,000 less than if you just used the same monthly amount for your entire retirement.
Of course, the bigger the number that you can start with, the better. So, the next time you want to calculate your retirement “number”, consider making the adjustment above. It might make you realize that you are doing all the right things to prepare for the future and will take some stress out of your life today.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
