How Much Does It Take to Retire Comfortably on a $5k, $10k, or $15k/mo Budget?

have you ever been told either by a person or maybe a YouTube video that you need at least a million dollars in your portfolio to retire I've talked to a lot of people who've been told that and they're extremely frustrated because it seems as if there's this arbitrary number that you need to hit in order to retire well here's the thing there are many many people I know who have amazingly comfortable retirements and they have a lot less than a million dollars in their portfolio well I know other people who a million dollars wouldn't come close to helping them meet their retirement goals so what I want to do in today's video is help you understand how much would it actually take to create different levels of income and retirement so you can start to understand what the number might be for you to be able to comfortably retire hey everybody I'm James canole founder root financial and I'm here to help you get the most out of life with your money a lot of people just want the same thing what do I have to do to be able to retire whether it's an income amount or portfolio value there's not a lot of great information sometimes specific to their situation so they might look at Nationwide averages the Bureau of Labor Statistics said that the average retiree in 2021 spent 52 000 now that's a good starting point but the reality is it depends upon the state that you live in what your property taxes are what portion of your expenses are made up of Health Care there's so many variables that are specific to you that just looking at Nationwide averages doesn't quite cut it so instead of trying to look at what are average expenses let's look at it from the opposite perspective what would it take to create five thousand per month of income versus ten thousand per month of income versus even fifteen thousand per month of income because once you start to understand what that looks like then it might be easier to see what makes sense for your situation so let's actually just go through this exercise together instead of me saying look if you want 5 000 per month you need X dollars in your portfolio if you want ten thousand per month you need X dollars in your portfolio let's work out the numbers together so we can see what this might look like let's assume a couple are retiring we're going to call them Elon and Ilana dusk not to be confused of course with Elon Musk this is Elon and Ilana dusk they are both 65 years old so what do we know 65 years old and what we know is Elon has a social security benefit at full retirement age of three thousand dollars per month Ilana at the same age at full retirement age her social security benefit let's assume is two thousand dollars per month well their full retirement age based upon their birth year is age 66 and eight months so those are the details and let's assume they're asking the question can we retire you know we want to spend five thousand dollars per month what would it look like for us to be able to do so so five thousand dollars per month is the goal well based on the information we know let's work this out let's assume they retire today and they collect Social Security today well at age 66 and eight months they would both have five thousand per month combined so three thousand for Elon two thousand for Ilana but if they're collecting early they're going to take a reduction in their social security benefit here's what those numbers actually come out to so if Elon collects at age 65 his social security benefit isn't actually three thousand per month his benefit is two thousand six hundred and sixty seven dollars per month because he's taken an 11 plus percent reduction by collecting early if we look at Ilana her benefit if she's collecting early is one thousand seven hundred and seventy six dollars per month so combined you are looking at four thousand four hundred and forty three dollars per month of social security income at age 65. now that's not quite enough we've established that Elon and Ilana want to live on five thousand dollars per month so if they need five thousand and if they only have four thousand four hundred forty three coming in per month what that means is there's a shortfall in that shortfall in their situation is 557 dollars per month which on an annual basis comes out to around sixty seven hundred dollars per year now I'm going to take some Liberties in this video I don't know exactly what state Evon and Ilana live in I don't know exactly what state you live in however what I do know is that with Social Security many states don't tax Social Security benefits and with these specific numbers we're looking at so far they're likely not paying taxes at the federal level on their social security income because of something called provisional income so when we look at this I'm going to assume they're in a zero percent tax bracket because at these numbers that's actually very likely why I'm saying that is when we say we need to generate six thousand seven hundred dollars per year of income from Investments we don't actually need to apply any taxes on that for this situation what we do need to know however is what portfolio size is required to create sixty seven hundred dollars per year of income I'm going to assume a five percent withdrawal rate so Elon and Ilana are invested in a portfolio and applying a strategy a withdrawal strategy that says they can take out five percent per year of their portfolio so if we divide sixty seven hundred by five percent what that tells us is a hundred and thirty four thousand dollars is the required portfolio value needed to make this happen so if Elon and Elana came to me and said James can we retire we're 65 the reduction in our social security benefit by collecting at 65 would be four thousand four hundred and forty three per month we also have a hundred and thirty four thousand in our portfolio that tells me you're probably in a position to be able to retire now what if Elon and Ilana said James we have no money in our portfolio does that mean somehow we need to get from zero dollars to a hundred and thirty four thousand dollars as soon as possible to retire no because keep in mind the portfolio is only one aspect should one relatively small aspect of their total income plan in this scenario the other thing we know is if they just wait another one year and eight months so 20 months from now then all of a sudden what do we know well what we know is they can then collect their full social security benefit so if they waited till 66.8 or 668 months to retire now all of a sudden 5 000 per month comes from Social Security that fully meets our needs which technically means you don't have to have any money in a portfolio to be able to maintain that lifestyle in fact if they're waited all the way until 70 their social security benefit would be even higher because of something called delayed retirement credits you get an eight percent increase in your social security benefit every year after your forward retirement age that you don't collect so in fact if they waited until 70 to collect their total social security benefit would be in excess of their monthly needs so what I hope this starts to illustrate is there's not a one-size-fits-all answer James I want to spend five thousand per month how much do I need in my portfolio well potentially nothing if you wait long enough and grow a large enough social security benefit or pension benefit or some other income Source or maybe 134 000 if you retire at 65 with these numbers maybe a higher portfolio value if you collect Social Security even sooner which is reducing your benefit even more which means more of your income has to come from your portfolio so that's what it looks like if they want to spend five thousand dollars per month but as I mentioned we want to look at multiple different income amounts in retirement because everyone's different than what they want to spend what if Elon and Elana now come to me same exact circumstances 65 years old full retirement age at 66 and 8 months 3 000 per month in Social Security for Elon 2000 for Ilana they say James we've reconsidered we actually want to spend ten thousand dollars per month in retirement what might it cost to do that so let's go through that same exercise and say now the goal is ten thousand dollars per month of income well I think what some people might think they say okay well we're doubling the cost of retirement so going from five thousand ten thousand does that just mean we double the portfolio value we needed 134 000 before now we need what 268 000 and everything's good no because we're not just doubling the portfolio value because Social Security made up most of the living expenses in that previous example and Social Security is not doubling it's still going to be the same fixed amount so we're going to need more than double to come from our portfolio to make up the shortfall so let's go to that same example but there's going to be a Twist here that's really important that you realize this for your specific numbers if you recall we said if Elon and Elana both collect at age 65 their social security benefit would be four thousand four hundred and forty three dollars per month now that's what it seems to be at first but there's a concept of something called provisional income of Social Security I'm linking a video here if you want to see exactly how Social Security gets taxed be sure to watch this video once this video is complete but provisional income is the way that we determine how much of your social security benefit is included in your taxable income from the previous example nothing was included in taxable income because their provisional income was under the threshold to the point that none of their benefit was taxed well now based upon how much is going to need to come from Elon and ilana's Ira or other portfolio in this example I'm going to assume that they're in a 10 tax bracket and when I say a 10 tax bracket I mean a 10 effective tax bracket not marginal tax bracket but effective so if you average all of their income over all the different tax brackets for Simplicity let's just assume 10 well now they've exceeded the provisional income thresholds in a full 85 percent of their social security benefit is included in their taxable income is mean 85 percent of it is taxed but 85 percent of it is subject to that 10 is what that means what does that do to Social Security well it's no longer actually four thousand four hundred and forty three dollars that they would receive after taxes now they're receiving four thousand sixty five dollars after taxes so we want to look at after taxes because if you say you want to spend ten thousand dollars per month you probably don't want to spend ten thousand per month knowing that two thousand that is going to the IRS that really means eight thousand is yours you're talking about ten thousand dollars per month to do what you want to do so forty thousand sixty five dollars is coming from Social Security what that means is the shortfall the remainder here that is what needs to come from their portfolio and in this example the shortfall would be 5935 dollars per month which comes out to 71 220 dollars per year so this is the amount they need to be able to generate from their portfolio to complement Social Security and live on this ten thousand dollars per month that we're looking at right here we're not done yet because this money is also subject to taxes so 71 220 that's after taxes so if we're assuming a 10 tax bracket then we need to divide that number by ninety percent in other words we're saying seventy one thousand two hundred and twenty dollars represents ninety percent of the larger number because once ten percent is extracted for taxes you have ninety percent left over so that comes out to seventy nine thousand one hundred and thirty three dollars per year pre-tax that they would need to pull from their portfolio so so what we do next is we have divide that so what we do next is the same thing we did in the previous example okay 79 133 dollars needs to represent call it five percent of a larger portfolio value so if we divide this by five percent what we get is we get 1.583 million dollars so one million five hundred and eighty three thousand dollars that's how much Elon and Ilana would need in this example so that after taxes they would have enough from their portfolio to supplement the Social Security after tax amount and be able to live on ten thousand dollars per month as you can see this is a very different number than what was required to live on five thousand per month and that's because in the previous example ninety plus percent so the five thousand dollar per month example ninety plus percent of the income came from Social Security a very small amount needed to come from the portfolio well now a much larger amount needs to come from the portfolio almost 60 percent of the monthly number so that's the reason for their dramatic change and how much of a portfolio is required to make this happen but this is how much portfolio is required to do this at age 65. what if Elon and Ilana kept working until full retirement age how would that change things well what it would do is now the social security benefit is higher and because the social security benefit is higher the amount that needs to come from the portfolio is lower so if I was to run through those same numbers what we would see is the new amount they would need in their portfolio is one million four hundred and forty seven thousand dollars so this is at 65 they would need one million five hundred and eighty three thousand at 66 and eight months they would need one million four hundred and forty seven thousand if they waited all the way until age 70 to retire and start collecting Social Security benefits then they would need just over a million dollars I'm going to run it to a million dollars in this example to be able to retire and spend ten thousand dollars per month six thousand three hundred thirty three pre-tax would come from Social Security the remaining after tax amount would need to come from their portfolio in the portfolio size needed to generate that would be be a million dollars all right now Elon Ilana come back one more time they say James you know what it's not 5 000 per month we want to live on it's not even 10 000 per month we want to live on we are really thinking about it looking at the budget getting the cars we want the things we want to do we've determined it's really going to cost fifteen thousand dollars per month to do what we want to do how much portfolio do we need to make this happen so let's go through the same exercise now we've already worked out how some of this math works and provisional income and the after tax so let's just look at the numbers without going through the full exercise we did previously the first thing we're going to do in this example is I'm going to assume a tax rate again I'm taking some Liberties here and using round numbers to make the math relatively easy as we go through it and I'm going to assume a 15 effective tax rate for Elon and Ilana in this specific situation as a reminder a 15 effective tax rate means the marginal tax rate is actually higher but the effective tax rate is the Blended tax rate across the board so if we assume that then at age 65 live I want to look at what would the after-tax social security benefit be it would be 3877 dollars so remember they take a reduction for collecting Social Security at 65 instead of 66 and 8 months and then that reduction of that amount 85 percent is now taxed at 15 so the after-tax amount of Social Security is three thousand eight hundred and seventy seven dollars what does that mean it means the remainder or the difference that needs to come from the portfolio while the remainder in this example is eleven thousand one hundred and twenty three dollars per month that's how much needs to come from the portfolio after tax every month to supplement what's coming in after tax from Social Security so the next thing we do is we divide that by 85 percent so this number here this needs to represent 85 percent of the pre-tax number so 85 percent so eleven thousand one hundred and twenty three dollars divided by 85 percent we get thirteen thousand eighty five dollars per month I'm rounding these a bit just to use round numbers but if you have thirteen thousand eighty five dollars per month paid fifteen percent taxes on that what you get is eleven thousand one twenty three per month after taxes the next thing that we have to do same thing as before how do we translate this to an annual number well 13 085 per month represents about a hundred and fifty seven thousand dollars per year that's how much we would need before taxes are taken out to generate an after-tax amount sufficient to complement or supplement Social Security same thing as before again divide this by a five percent portfolio withdrawal rate now what we get is we determine we need a portfolio of three million one hundred and forty thousand dollars in order to generate the hundred and fifty seven thousand dollar distribution per year to allow us to spend fifteen thousand per month after tax for the rest of our life once again let's take a look at what would these numbers be if they retired at 66 in eight months instead of retiring at 65 so this number here is at 65. well 66 and 8 months instead of 3.1 4 million dollars in their portfolio they would need just about exactly three million dollars to make it happen at age 70 again social security goes up which means portfolio income needs go down they would need 2 million 675 000 to generate income sufficient to complement Social Security so as we go through this I want to just illustrate the point here you probably don't have the same exact social security benefit as Elon or Ilana you probably don't even have the same exact living expense desires as Elon or Ilana but I wanted to illustrate the fundamental things that go into determining what you need to be able to make this happen so what could impact this in your case well the biggest thing is non-portfolio income so pension Social Security we saw how different Social Security amounts changed how much needs to come from the portfolio real estate income part-time work and retirement all those things have major implications in terms of how much portfolio do you need to supplement the difference or the shortfall between those income sources and what you actually want to spend your age of retirement is hugely important the difference between collecting at age 62 and age 70 is a benefit that can be 75 percent or more Higher by age 70 than at 62. so depending on when you retire that's going to dramatically change how much is coming in from Social Security and not just that but if you are tired at age 70 versus say age 60 your portfolio doesn't have to support your needs for as many years assume life expectancy of 90 in both those cases if you retire at 60 you need 30 years worth of living expenses from your portfolio if you retire at 70 assume in same life expectancy you only need 20 years worth of distributions from that same portfolio which means less of a portfolio is needed to make that happen then your actual expenses obviously matter you saw how dramatically different those portfolio values were that we looked at based upon spending five thousand per month ten thousand per month fifteen thousand per month another big thing is your expenses aren't going to stay consistent there's the go go years when you first retire and you're active and you're traveling you're doing things in your spending then there's a slow go years where you're starting to spend less you're not doing as much you're not traveling as frequently then there's the no-go years where you're typically doing very little but medical costs might start to increase at that time because of a need for care so understand what your actual expenses will be don't just plan on five thousand or ten thousand or fifteen thousand forever but have an understanding of how that might change and then finally tax rate so the higher your tax rate the more you'll actually need in your portfolio so that after taxes you can have what you actually need to live on so depending on what state you live in that's going to impact your tax rate and depending on the composition of your portfolio is it mostly pre-tax or mostly Roth or mostly brokerage all these things matter so we went through a very simple example to illustrate the method by which you can calculate this but all these factors will influence this so that you can come up with the right number for you one thing that I hope you see as we're going through this is how dramatically important your social security benefit is the timing at which you collect the way in which you collect has huge implications in terms of how large your portfolio needs to be or how much you can spend in retirement that's why I created this video right here it's so important that you understand how to maximize your social security benefit because that can become the foundation of a well-rounded financial plan so in this video that you see the link for I talk about four simple things you can do to increase your social security benefit which ultimately helps to create a much better much more fulfilling retirement when you include everything else as well 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: 252,177

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: nsDlWfBq8nA

Length: 20min 47sec (1247 seconds)

Published: Sat Oct 07 2023