Jacob: Hey, everybody, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm a certified financial planner, and I help people just like you retire on a daily basis. And in this episode, I wanted to answer a question that a lot of people in their 50 or sixties are are looking to answer. And their question really is, how much do I actually need to retire?
And, it's a common question. And if that's one that you have, no worries because that is one that everybody has, especially in the stage of life that we're talking about as people are getting near retirement or beginning to think about it and really trying to evaluate, hey. Do I have enough to retire? Am I gonna meet my goals, by the projected retirement date? Am I gonna be able to do this?
That's really the question. And so I wanted to talk through that idea, that concept, and really figure out how much is enough. And an issue with that question in general is that all of the human race, we we struggle with having enough. We always set a goal for ourselves, and then we achieve that goal, then we re up, and we set a new goal because what we achieved was not satisfactory. So the question of how much is enough is we're gonna try to make it as objective as possible for this discussion, because at any given point, enough is never enough if we decide to spend more or buy a a new house or buy a really nice car.
Like, we could always spend more money. So the question is, how much is enough for the lifestyle we're currently living, and how will that get us through the rest of our lives and throughout our retirement? So a few of the problems that I've seen with this question of how much do I need for retirement or how much is enough to retire successfully is that there are so many different, I guess, rules of thumb out there that are maybe they're helpful, but they're definitely not something to go on, completely because there's so many different ones. And I think the rule of thumb is based on the incorrect number. So a couple of those could be, like, I've seen that you need 80% of your preretirement income that you were earning as you were working.
You need 80% of that as your retirement income throughout your retirement to retire successfully. And I have a question, you know, on that, like, why 80%? What where do we pull that number from? Because if your lifestyle stays the same, if your spending remains the same, shouldn't you need a 100% of your income? I think the purpose of that 20% difference there, you know, needing 80% is it has to do with, like, savings rate or how much you are potentially saving.
But there are so many other factors that go into 80% of your preretirement income because that preretirement income, well, that that was taxable. Right? So maybe that 20% is accounting for taxes. But if all of your money is in a tax deferred account, it's gonna be taxed anyway whenever you withdraw it. So that means that necessarily wouldn't work out the way you would probably hope.
So so there's so many different things that are kind of wrapped up in there because if all of your money is in a Roth, well, that's gonna be tax free income to you whenever you take that out. Or if all of your money is in a taxable account, well, that could be very tax beneficial for you, right, because it could be partially tax free or long term capital gain rates could apply. So the 80% of preretirement income rule of thumb is not necessarily helpful because many people don't need that much money or some people need more depending on what your income is. So I think it's basing it on the wrong thing. It I think basing your your income need in retirement on your current income before retirement could just be irrelevant in general.
So another rule of thumb that I commonly hear is that you need 10 to 12 times your salary at age 60 or 65 or whatever age, and that kinda comes from a study that Fidelity has done. And this is once again a an a retirement income number that is based on what you were earning before retirement. The the issue I have with basing your retirement income need based on the the the amount you were making before retirement is that it assumes you were spending everything you made before you retired. And that's often not the case. Many people are saving large, large portions of their dollars that they earned before retirement because their salaries or their incomes are at such a high level compared to what they were previously.
They're earning more money likely than they've ever earned before, and and they're not spending all that money, especially if they've done other things correct throughout their life in terms of paying off debt, paying off a mortgage, getting rid of car payments, building up a a good cash fund. All these different things matter, and they really do affect how much money and income you need in retirement. And another rule of thumb is the 4% rule. And this is basically saying if you took 4% of your dollars that you have saved out of your account on an annual basis, you'll never run out of money. And this also assumes that you invest that money correctly and in a certain way to offset inflation or offset how much you're taking out of your account.
But the 4% rule, I think, is a really good rule from a math standpoint. It makes sense. It's very applicable, but it's not something that I would entirely base my retirement decision on. I think it's almost like a really good double check type rule of thumb. Like, hey.
What I need from my portfolio is x amount. This is how much I currently have in my portfolio. Is this gonna be okay in terms of sustainability? And then we could you do the math to figure out, does that 4% rule confirm what we were hoping? And so these are some different rules of thumb that I don't necessarily like.
They could be applicable, especially the 4% rule, but the 80% of preretirement income or the 10 times salary, those are different things that I'm like, how are they objectively helpful? And one thing you have to know here is that rules of thumb are exactly that. They're rules of thumb. So every single person's retirement situation is gonna be different. Right?
Some people have pensions. A lot of us don't have pensions. Some people have really high Social Security amounts. Others don't. So different income sources factor into different people's ability to retire or how much they need to actually pull from their portfolio of assets.
So rules of thumb are are helpful in some situations. I definitely would not rely on them. So today, we're gonna talk through how I would suggest, thinking about how much is enough, how much you need to retire, and can you do that. So, before I do, I just wanted to kinda walk you through a quick story. So David and this is just a made up name, but it's a real prospect that I that I was meeting with.
David, he was a prospective client of mine. He came to my office, with his coffee in hand, and we had a great discussion. He filled me in on his new hobbies that his wife recently picked up on and how the kids were doing in college. And I just really enjoy hearing those stories about my clients' personal lives because, in in general, the money is important, and that's my job, and it's it's it's valuable. But, ultimately, if there's no purpose behind why we do the money things correctly, then it's it's not valuable in my opinion.
So hearing that, the family was doing well, that his wife was doing well, the kids were doing great in school, It was important to me. I love hearing the personal sides of my clients' lives. But we continued on, and he began to ask me about what he called his number. And this is probably something we all refer to, like, the number is, you know, how much do I what do I need to reach in terms of assets saved and built up to? What number do I need to reach to retire?
And he mentioned he was just getting tired of the grind of working long hours and having to travel and things like that. And he wanted to be able to spend more time with his wife and and go visit his kids at college and do things like that. So we began to quickly run through some numbers and dive into what this might look like for them. And we added up all of his assets, IRAs, four zero one k's, cash, everything like that. And then we calculated how much they had in their monthly expenses, things from mortgages to car payments.
He had a a HELOC, and just other normal living expenses. And by doing this, I realized that David had a a pretty big problem. And it's not that he didn't have a good chunk of money saved. He had just right at $2,000,000 overall, but they were spending $12,000 a month on these different things, mortgages, car payments, HELOCs, normal living expenses, food, gas, all those things. So he didn't have a savings problem or an assets problem.
He had a spending problem. Right? And so common rules of thumb today would say, hey. You need to have $2,000,000, $3,000,000, whatever the dollar amount is to successfully, you know, retire in today's world with inflation and just the high cost of living. And so David, he had he had the $2,000,000 saved, but his issue was not that he had enough money or not.
His issue was spending. Okay? And so this goes back to my initial thought of basing how much money we need on how much we earned throughout our career could be the wrong way to go. The way I like to do it is I like to say, how much do we need? How much are we spending?
That's something we can control to an extent. You know? And so what I like to do is say, hey. Because we spend x amount of money, this is how much money we would need to take out of our accounts. So this means we take it that number, do a little bit of math, and we figure out how much we would need overall to make that sustainable and last the rest of our lives.
So so David had around $2,000,000. And if we do some quick math on that, if he's taken out $12,000 a month and we use the 4% rule, you can see that he would need around $3,500,000 to last the rest of his life. And so that's what I mean by the 4% rule. It's not the hard and fast, but it is a way to to really check the math to say, hey, is this possible or are we way off? And so in David's case, he was way off.
Right? Not because he didn't have enough money in my opinion. He is because he's spending so much. So I tell you this story, not because David is up at creek and he'll never be able to retire. In fact, we're we're actively working on a plan right now to make this retirement possible.
I tell you this because if there's one thing I want you to understand, it's it's this, you know, and I've already kinda mentioned it, but your ability to retire is far less about how much you have saved and much more about how you spend. If David had his house paid off, had no car payments, and had no other debt, his monthly expenses would be cut down to around $7,000 a month. Now if we use that same 4% rule on the $7,000 a month, you would see that David would actually be able to retire. Right? Because he would need right around that $2,000,000 mark to sustainably retire and live on that money for the rest of his life.
And once again, that 4% rule is just general rule of thumb. I like to use it to double check. But if we do the quick, just rough math on that, we can see that if he had his cars paid off, his house paid off, and no other debt, you know, those expenses of 7,000 a month would be sustainable with what he had saved. So how much do you need for retirement? There are a bunch of different rules of thumb out there, and a common one I see is that you had to have some multiple, at certain ages.
Like, if you make 250,000 a year, you need nine times your salary saved. So I would say that your income or what you're making before you retired is a bad indicator of what you need whenever you do retire, because I have plenty of clients. They have pensions. They've got really good social security incomes. They've got other disability incomes.
They have different sources of income that are not at all tied to their assets that they have in their portfolio. And in fact, many of them can live on the assets they have that are just recurring streams of income from these different sources without ever touching a dollar in their different savings accounts or retirement accounts. And so the it really comes down to so in that situation, they really don't need a whole lot of money saved. Right? Because they've got a stable income no matter what because of their particular situation.
And then there are others that don't have very much in social security. Perhaps they were self employed and just never really paid a bunch in, or or perhaps they were a stay at home mother and so they didn't have an earned income, but they were doing really hard work. Right? So those different situations are different. Right?
Which means you have to have more assets saved to replace that fixed income that other people are getting. So everyone's situation is different, but the the the common denominator is spending. We all have to spend money in some capacity. So I would say that income is a bad indicator of of what you need to retire and that your spending number is a more accurate, representation of what you will need in retirement. Okay?
And so how do I assess this? How do I figure out what someone might need in terms of using just general rough numbers and rough math? So typically what I do is I say, we're gonna take your monthly spending amount. We're gonna multiply that by 12 so that we get the annual spending amount. And this is after tax money.
Like, actually how much you spend is not how much you need. Right? So for example, if we have $5,000 a month that we spend on just the various different things to live, and and we would wanna multiply that by 12 to get the annual number, which brings us to 60,000. And then we'd multiply that by 20, representing the number of years that that we would need. So that brings us to 1,200,000.
So the reason I say twenty years is because this, this twenty years does not assume anything in terms of inflation. It does not assume anything in terms of growth rate of your assets. It just says if you had $1,200,000 and you took 6,000 out a month, assuming a 0% inflation rate, a 0% interest rate, no growth on your assets, you could live for twenty years on that money. Right? If you want that money to last longer, well, you have to invest it correctly to achieve the investment returns that you're hoping you to get.
And so I like to use that twenty year mark is because it's not too short, but it's also not thirty years. Because if you if you if you needed thirty years on a 0% interest rate or 0% returns, that's a really long time to have 0% returns. So I like to use that twenty year mark just to give a rough estimate, and then, obviously, we have to invest that money correctly for it to last longer. So, that's typically the way that I do just really quick math is I say, hey. How much do we need a month?
Multiply that by 12 and then multiply that by 20, and that is how much money you need saved if that's how much you're gonna have to withdraw from your account. Now let's say at the same time, you spend $5,000 a month, but 4,000 of that is met by Social Security or other pensions or other different fixed income sources, and you only need to actually take 1,000 from your, saved assets every single month. Well, that's only 12,000 a year. Multiply that by 20, and that's a lot less than 1,200,000. Right?
So at the same time, your spending amount, we have to factor in how much you're actually gonna be taking from your accounts, not how much you actually are gonna be spending because it becomes an inaccurate number. Do you see how that's possible? So this is hopefully a way to say, hey. You you don't need $2,000,000. You don't need $5,000,000 like some people are saying.
A lot of that is just fear mongering, and I I'm not a fan of it. If we can control our spending, limit that in such a way that we can live off what we currently have or other income sources that I've already mentioned, then we can retire and enjoy it and successfully stay retired. So as you continue to evaluate how much you need to retire or how much is enough, remember, it that number can't be determined based on how much you're earning. You know? And if if you're earning $200,000 a year and you're spending $200,000 a year, that is a different issue.
Right? You have to find a way to control your spending. So it comes down to how much you spend on average or expect to spend in the future. And then we also have to factor in, you know, your Social Security income or other income sources. The gap that's left over, that's what we need to take from the portfolio.
So that's what we have to figure out how much we need. We multiply it by 12, then multiply that 20, and then that's our rough number that we would need to last twenty years, assuming it's not invested. Obviously, it would be invested earning some interest over those twenty years, so therefore, it would last longer. But this is a general way that I like to determine, hey. Can someone retire or not?
So retirement planning is is much more personal than than just general rules of thumb. So I encourage you to speak with, you know, your trusted financial planner if you want to have a discussion around that to see how they can help you, develop a retirement income plan so that you know that you can retire successfully and never have to go back to work because that's the ultimate goal. So I appreciate you tuning in to this episode of Retirement Answers. Hope it was helpful for you, and I look forward to talking with you again next week.