How Much Do You Need to Retire in 2023?

how much do you need to retire as well as difficult questions that most people Flounder with when they try to come up with an answer for themselves now the good news is it's surprisingly easy to calculate that once you know two key pieces of information so in today's video I'm going to walk you through what those key things are and exactly how I can calculate it so you can understand what you need to retire hey everybody I'm James Knoll founder brute financial and I'm here to teach you I get the most out of life with your money so as we jump into this today and walk through a framework for understanding how much you need to retire let's start by asking this how much do you think you need now if you just imagine wherever you're watching this video stop for a brief second and think do I have a number is there a number in my head that I've calculated I need is there maybe a nice round number that I think is probably the right answer do you have a number if so say yes or no in the comments would love to see how many people actually have that number now most people don't actually have an answer to that question the good news is even though there's many details and variables that impact this things like inflation and taxes and cost of living adjustments and all that there's two simple things we can do to get a good answer and those two things that you need is number one what are your expenses going to be in retirement and number two what portion of those expenses need to be covered by your portfolio now you might be saying how on Earth can you calculate a portfolio need with just those two expenses well let's walk through an example to show you how let's start with your expenses now I've talked on other videos and podcasts about how do you actually determine your expenses in retirement it's something that many people struggle with there's two ways there's a top-down approach and there's the bottom up approach the bottom-up approach says start with a spreadsheet or start with a piece of paper and say what are all my expenses going to be in retirement this could be groceries this could be cell phone bill this could be travel this could be property taxes literally going through to say what are all my expenses what are those expenses going to be so sign a dollar amount to each of them add them all up and that's your expenses now that takes a lot more detail but that's how you get a real precise sense of what your retirement expenses will be now if you say I do not want to go through that exercise or I have no idea in What expenses to account for there's an easier way that will get you very close this is the top down approach ouch a top-down approach says take your take-home income today assuming you're still working now with your take-home income today assuming that covers all your needs well can we just maintain that income throughout retirement but the good news is we probably don't need to maintain all of it here's an example let's assume you take home ten thousand dollars per month after taxes to use a nice rounded number well if 10 000 a month is coming in but you're paying a mortgage let's assume the principal and interest portion of that mortgage is two thousand dollars and that mortgage will be paid up by retirement we don't need ten thousand per month in retirement you need eight thousand because two thousand those expenses will be gone then let's also assume you're saving a couple thousand dollars per month to send kids to college or to Roth IRA or Whatever It Is Well by the time that you retire you don't need to save for retirement and you've likely sent kids to college or maybe have some money saved up to cover the rest well if that's the case 10 000 is coming in two thousand can be backed out for mortgage two thousand can be backed out because you no longer need to save for college or retirement when you're in retirement that leaves you a six thousand dollars now maybe you want to add something in or take more stuff out but really what you're doing is saying what am I spending today what are the big expenses that will either be added to that number or taken out of that number and then we maintain that throughout retirement so in this example maybe six thousand dollars per month is what you're planning on so regardless of how you do it you don't need to be perfect with this most people aren't perfect their first time around but you have to start with something that's step number one so start there determine your expenses in order to use an example to Now cover step number two let's assume that whether you use the bottom-up approach the top-down approach you come up with say a hundred thousand dollars per year one hundred thousand dollars per year is what you need to retire again the number itself is not important as much as the framework of how do we think about this well when you look at that and you say okay I need a hundred thousand dollars per year and maybe I'm going to expect to live 30 years in retirement that can seem quite overwhelming so oh my gosh do I need three million dollars in my portfolio to support that you know 100 000 per year times thirty well probably not for most people no and that's where we go to step number two step number two is saying of those expenses how much actually you have to come from your portfolio and I say how much needs to come from your portfolio because odds are good you have some other income sources that could be a pension that could be Social Security that could be rental income that could be part-time work this could be a number of different things but what we want to do is of the amount that you need to retire so 100 000 our example Whittle that down to how much action needs to come from your portfolio now because everyone has different non-portfolio income sources this number is going to be different for anyone if we have 10 different people in a room and all of them say yeah my retirement expense is a hundred thousand dollars per year that doesn't necessarily mean they all need the same exact portfolio to support that because they all probably have different income sources let's actually look at two examples so we can compare and contrast how things change let's look at the first example of a married couple and with this married couple let's assume one of them has a pension of say 16 000 per year one of them has a social security benefit of three thousand dollars per month so thirty six thousand per year and the other has a spousal benefit of fifteen hundred dollars per month Social Security 30 which is eighteen thousand dollars per year so pension 16 000 one social security benefit of thirty six thousand in another social security benefit or spousal benefit of eighteen thousand when you add all that up that's seventy thousand dollars per year so this couple that wants to live on a hundred thousand dollars per year seventy percent of that is already covered by non-portfolio income sources which means the difference that remain thirty thousand that's what needs to come from their portfolio so what you can do from there is just apply withdrawal rate to that let's assume they've determined that based upon their age and their portfolio mix and how they're going to withdraw money from their portfolio they can take out five percent per year well what you do is you take that thirty thousand dollars that they need from their portfolio divide it by five percent and what that gives you is six hundred thousand dollars which says to this couple if you have six hundred thousand dollars in a portfolio you could take out five percent per year which represents thirty thousand and that thirty thousand would then be added to Social Security and pension to give the full hundred thousand that would allow you to meet your needs throughout retirement so when this couple says how much do I need to retire the answer with this simple example is six hundred thousand dollars now let's look at another example in the second example let's assume we're looking at a single person who's not married and let's assume that this individual owned a business it maybe didn't pay a lot on the social security so this individual has a social security benefit of a thousand dollars a month so twelve thousand per year but no pension no spousal benefit no other income sources outside of their portfolio well this individual has twelve thousand dollars per year coming in from Social Security what that's telling me is eighty eight thousand dollars per year needs to from Investments to get live on a hundred thousand dollars per year total if we apply the same five percent withdrawal rate that we did in the other example what this means is this individual would need one million seven hundred and sixty thousand dollars in their portfolio to support eighty eight thousand dollars per year again we're taking eighty eight thousand dollars divide it by five percent to come up with a portfolio value of one million seven hundred and sixty thousand so take a look at these two examples both of them won a hundred thousand dollars per year to live on one of them in one example needs a six hundred thousand dollar portfolio to make that happen the other individual and the other example needs over 1.7 million dollars to make this happen about three times as much the difference was how much each of them had a non-portfolio income sources so you can start to see here if you know just two details you can get very close to understanding exactly how much you need to retire so of course it's really important to know what will your actual retirement expenses be and then once you know what will your non-portfolio income sources be you can understand the difference between those two what do I need and what do I have before portfolio that difference needs to come from your portfolio and you can use that number to calculate what your portfolio needs to be now I say this is going to get you close so I want to be very clear there are more details that would help you really get a precise answer when you start to factor in things like taxes or inflation or does your pension have a cost of living adjustment or does it not are there other things like inheritance or family support or sale of property there are so many different things that could impact this but this is going to get you 80 to 90 percent of the way there and for most people at least give them a general sense of how much approximately do I need to be able to make this retirement thing happen so let's quickly walk through what some of those other details are just so that you can be aware of them as you're planning for your situation the first is taxes now it's simple enough to say okay I'm in a 10 tax bracket or 20 tax bracket I can just add that on to my expenses but you just have to be mindful of the fact that IRAs versus Social Security versus brokerage accounts versus Roth IRAs they're all taxed differently so make sure you have a detailed analysis of what will your actual tax bracket be when you combine multiple different income sources number two is inflation so what's inflation going to be over time now if you're using standard withdrawal rate rules whether it's the four percent rule or guidance approach or whatever it might be there's an inflation Factor that's already assumed there it's assumed that you're going to take the withdrawal rate the increases with inflation but then you look at things like Social Security well Social Security also has a cost of living adjustment maybe it doesn't perfectly keep up with inflation but it's fairly close the big thing is do you have a pension if a pension is making up a majority of your income needs and it's a private pension chances are good there's not a cost of living adjustment on it so your pension day one of retirement the amount is going to be the same forever but the purchasing power is going to diminish each and every year so understand the impact of inflation on your expenses and understand how your different income sources will adjust for that third is marital status and this isn't just because okay if you're married maybe you have one spouse that's spending more than the other no it's because of tax brackets if you're married you have higher thresholds until you hit certain tax brackets on top of that you have double the standard deduction so when you look at a single individual and a married couple they're both living whether it's fifty thousand a hundred thousand two hundred thousand per year for the same level of income the single individual is going to be subject to higher tax brackets so even understanding how that works is going to be impacting your living expenses fourth is insurances so as you look at this it's not just going to be consistent expenses throughout retirement if you retire before 65 you're going to need a health insurance solution now that might be extra expenses until Medicare kicks in maybe you're also looking at long-term care whether that's the expense of long-term care insurance in the first several years of retirement or it's the expense of an actual long-term care event later in retirement how are you factoring in some of these other factors on top of just a basic living expense and then fifth is lifestyle changes it's very rare that you start spending one amount in retirement and that amount just increases perfectly with inflation over time you have what's traditionally called the go go years when you first retire you have your health you have your energy you just retire there's an excitement to do things you're really living large those first several years in many cases then you have the slow go years where you're still healthy but you're maybe not quite as energized as you were before maybe it's not quite as easy to get around your expenses start to drop then you have the no-go years the no-go years or the later years of retirement maybe there are health issues maybe there are long-term care needs your expenses might actually start to rise a bit as you need to fund these expenses so when you look at that don't just plan on one single number forever but understand how will different phases of retirement cost different amounts so those are some of the details to be aware of but if you go back to those two key pieces of information that we looked at one what are your living expenses in retirement and two how much of those living expenses needed to come from your portfolio you're going to be most of the way there now if you go through that exercise and you say yeah I'm feeling pretty good about my ability to retire well then be sure to check out this video here where I walk you through the five reasons that it might be time to retire right now once again I'm James Knoll founder root financial and if you're interested in seeing how we help our clients at root Financial get the most out of life with their money be sure to visit us at www.rootfinancialpartners.com

Channel: James Conole, CFP®

Views: 38,102

Keywords: investing, retirement planning, tax planning, financial planning, retirement, personalfinance, taxes, dividend investing, financial planning at 50, how do I retire?, long-term investing, financial planning at 60, roth conversions, roth ira, IRA, individual retirement account, benefits of investing, pros and cons of investing, donor advised fund, financial education

Id: Tn5ceTxtBkM

Length: 12min 50sec (770 seconds)

Published: Sat Jul 29 2023