April 15, 2025 • 17 mins
Wondering if you can retire at 60 with $2 million? In this episode, I walk you through a simple, 3-step process to figure out exactly how much you need in your portfolio to retire comfortably—and confidently. Whether you've already run the numbers or you're just starting to think about retirement, this is a great way to gut-check your plan.
We'll talk about how to calculate your real retirement expenses (hint: it’s probably not your current salary), factor in income like Social Security or a pension, and then figure out what size portfolio you actually need to fill the gap. I’ll also cover some key nuances that can make or break your plan—like uneven income, taxes, and what happens if one spouse passes away.
If you’re looking to make smart decisions about retirement, this episode is for you.
Questions answered:
1. How do I figure out how much I really need to retire, based on my actual expenses—not just my current income?
2. How can I tell if my $2 million retirement portfolio will be enough to support my lifestyle at age 60?
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Timestamps:
0:00 - Determine retirement expenses
3:54 - Retirement taxes will be lower
5:12 - 2 ways to determine expenses
7:17 - Determine nonportfolio income sources
8:38 - Determine portfolio withdrawal rate
11:06 - Consider uneven income sources and expenses
12:54 - Consider taxes in retirement
14:00 - When a spouse dies
15:22 - Wrap-up
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Today, I'm going to show you the three very simple
steps that you can take to knowexactly how much you need in
your portfolio to retire.
Now, even if you've gonethrough a very comprehensive
process to determine that numberfor yourself, this is still a
great process to go through justto gut check what you've done
and make sure that you'relooking at things from all
angles.
So I'm going to walk youthrough these three very simple
steps and then, at the end, I'malso going to walk you through
(00:20):
some nuances to this that couldchange things a bit.
So stay tuned for both the coreprocess to go through, as well
as some of the things that couldpotentially change this or
derail this if you're notcareful.
This is another episode ofReady for Retirement.
I'm your host, james Canole,and I'm here to teach you how to
get the most out of life withyour money.
And now on to the episode.
(00:42):
The first thing that you need todo when determining how much
money do you need in yourportfolio to retire is you need
to determine your retirementexpenses.
Now, before we talk about whatyour retirement expenses are,
let's first talk about what theyare not.
A lot of people fall into thetrap of thinking what I'm
earning today, that is theexpenses that I'm going to have
in retirement.
Let me walk you through anexample to show you why that's
not the case.
(01:02):
What you're earning today, youhave a lot of deductions, you
have a lot of taxes.
You maybe have a lot ofexpenses that aren't actually
going to be there when youretire.
Let's use an example.
Let's assume that you areearning $100,000 today and
you're trying to figure out howmuch money do you need in your
portfolio to retire.
Well, start with that $100,000,but don't use that as your
(01:29):
retirement expenses, even if youwant your lifestyle to stay the
same.
There are some things that aregoing to change.
For example, on that $100,000,you are paying payroll taxes.
Payroll taxes are also calledFICA taxes.
This is what's used to fundSocial Security and Medicare,
and that is 7.65% of everydollar that you earn up to a
certain cap.
That is going to pay that tax.
So, on $100,000 of income,that's $7,650 of expenses that
will no longer be there for youwhen you're retired.
So that's something that we canback out.
(01:50):
Let's also assume that maybeyou're saving to a 401k and
that's how you're preparing toretire.
Maybe you're saving 10% peryear of your annual salary to
that 401k.
Well, when you retire, you'reno longer saving to your 401k.
So 10% of $100,000, that'sanother $10,000 that will no
longer be there when you're notworking anymore.
Next, what if you have amortgage?
Maybe you're paying money to amortgage payment and that
(02:12):
payment is going to be gone bythe time that you retire.
So you're not necessarilytaking a pay cut, but your
expenses go down because there'sno longer a mortgage to pay off
in your retirement years, likethere is today.
Also, taxes as a whole For mostpeople.
They are paying taxes in alower tax bracket in retirement
than they are in their workingyears.
So let's quickly tie all thistogether so that you can see how
your actual retirement expensesmight be very different than
(02:34):
your expenses in your workingyears.
So you can start to see howthis is going to be different
for you.
So if we start with $100,000,as we did in this example, back
out $10,000 for 401kcontributions.
You no longer need to do thatwhen you're retired.
Now you're down to only needing$90,000.
Next, let's back out thepayroll taxes.
Again, that's $7,650 on$100,000 of salary.
(02:55):
Now we're down to $82,350.
Now let's make some assumptionsabout taxes.
Let's assume that thisindividual is filing taxes
single and they are using theirstandard deduction, which for
2025 is $15,000.
They would end up paying about$11,400 in federal taxes, before
we include state taxes.
But I'm going to leave that outbecause that's going to be
different depending on whatstate you're in.
(03:17):
And again, what we're trying todo here is we're trying to say
for this individual that'searning $100,000 in their
working years, what are theyactually spending after taxes
are taken out, after 401kcontributions are taken out,
after mortgage is taken out, sowe can see what number needs to
be replaced in their retirementyears?
So if we back out that roughly$11,400 in assumed federal
(03:37):
income taxes for this individual, now they're closer to about
$71,000 of expenses that theyhave.
Next, let's assume that theirmortgage is paid off and let's
assume that they're paying$1,500 per month in principal
and interest payments.
Property taxes remain,homeowner's insurance remains,
but let's assume that that$1,500 payment was going towards
principal and interest.
Well, if you remove that amount$18,000 per year or $1,500 per
(04:00):
month from $71,000, what youactually end up with is $53,000.
So what have we done there?
Just to tie it all together?
What we've done is we said forthis individual who's trying to
figure out how much money do Ineed in my portfolio to be able
to retire.
We are starting by asking themhow much do you have in expenses
and their expenses are nottheir income, which is a hundred
(04:20):
thousand today it's what dothey need to replace when
they're actually retired, whichwhat we've done is we've
narrowed that $100,000 down to$53,000.
Now, of course, just becauseyou're retired doesn't
necessarily mean you're notgoing to pay anything in taxes.
For the most part, there'sprobably going to be some taxes.
But just to use an example here, if this individual who now
needs to replace $53,000 ofincome, if they have $28,000 per
(04:42):
year from Social Security, so alittle bit more than $2,000 per
month if they take $10,000 fromtheir traditional IRA and
$15,000 from their Roth IRA,that is a total of $53,000 and
they would be in a 0% federalincome tax bracket.
That's due to what's calledprovisional income with Social
Security to determine how muchof that is taxable.
Plus, obviously, the Roth IRAis not taxed.
(05:05):
And then they have the IRAdistributions, but that would
fall under the standarddistribution amount or the
standard deduction amount.
So that's just a very basicexample to illustrate the fact
that once you have that $53,000,or once we have your expenses,
your actual taxes in retirementare probably going to be far
less in many cases than theywere in your working years.
So that step one is reallydetermine how much are your
(05:27):
expenses going to be inretirement.
There's two ways to do this.
There's what I'll call atop-down approach and that's
what we just did.
Start with a top-level numberthat you have today.
What is your income today?
Just your gross salary beforeany deductions, taxes, etc.
Then, from there, start pairingoff the things that will go
away in retirement.
Is that payroll taxes?
Is that a lessening of yourfederal tax bill, of your state
(05:48):
tax bill?
What about mortgage payments?
What about retirement savings?
What about other expenses thatyou have today that will no
longer be there?
Then, of course, you want toadd back things in that will be
there.
Are you going to take moretrips?
Are you going to do more thingsthat cost money that you're not
doing today?
So it's simply starting withyour top level number today,
removing what's going to go awayand adding back in what's going
(06:08):
to be there in retirement thatisn't necessarily there today.
That's a top-down approach.
It's going to be very simple.
You can probably do that injust a matter of a few minutes
and it's, for the most part,going to be approximately
correct.
A more detailed way, but a muchmore intensive and involved way,
is the bottom up approach.
The bottom up approach sayswhat is every single thing that
you're going to spend money onGroceries, utilities, your gas
(06:30):
bill, your travel, all thesethings?
Add them up line by line to seenot every single transaction
but every single category.
What do you estimate you'regoing to spend?
And you total those numbers upto get to the number that you
think you're going to spend inretirement.
I recommend both.
I recommend both.
I recommend both because I seepeople doing the bottom-up
approach and what tends tohappen is they miss a lot of
(06:51):
things.
They say, okay, yeah, I'm goingto retire, I might spend $4,000
per month in retirement,because they add up what they
can think of off the top oftheir head.
But then I say what is yourincome today?
And I might be taking home$15,000 a month in income today.
And I'll say well, that $15,000per month of income today, how
did you get to that $4,000?
And obviously there's ahumongous gap between those two
(07:11):
numbers and it makes them think,ok, yeah, when I did the
bottom-up approach, I was justthinking of what I could
remember top of mind.
So the top-down approach alsohelps you to come at this from
different angles.
But the bottom line is stepnumber one to determine how much
do you need in your retirementportfolio to retire is determine
what expenses will you have.
Step number two is to determinewhat will your non-portfolio
(07:33):
income sources be in retirement.
So once you know how much youwant to spend, what you have to
realize is that the role yourportfolio is going to play is
your portfolio is going tocreate the income to help you
spend that amount, but notusually the entire amount,
because you'll usually have thehelp of things like social
security or pension or things ofthat nature that are covering a
portion of your retirementexpenses.
(07:54):
Let's use a really simpleexample.
Let's assume that you want tospend $60,000 per year in
retirement.
Let's also assume that you have$25,000 per year coming in from
Social Security.
What does that mean?
It means that gap, that gap of$35,000, that's what we really
want to hone in on.
So, as you're looking at yourplan, start with your expenses,
which was step one.
(08:14):
That's the most involved of allthese steps.
It's probably the most timeconsuming of all these steps.
It's just to get that numberright and it's the most
important of all these steps.
Then back out any incomesources.
You will have Pension,annuities, social security,
things that are going to becoming into your bank account
automatically without requiringyou to draw down your savings or
your investment portfolio.
(08:35):
Add those things up and findthe difference.
In this example, 60,000 ofexpenses minus $25,000 of
non-portfolio income sources, inthis case social security the
gap is $35,000.
Now we can go to step three.
Step three says apply awithdrawal rate to that number
to determine what does the bigpicture portfolio need to look
(08:57):
like to create that level ofincome, not just year one of
retirement or year two ofretirement, but every single
year throughout retirement.
A common rule of thumb is calledthe 4% rule.
Now, I think there are otherways to do this, maybe even
better ways to do this in manycases, but the 4% rule is a very
widely known, well-known rulethat says if you have a
portfolio and if it's investedthe right way, you can be
(09:20):
reasonably assured that thatportfolio is going to last for
at least 30 years if you justtake 4% per year from that
portfolio.
So let's look at that.
What that's telling us is$35,000 per year.
In the example that we're using, that needs to represent 4% of
the bigger portfolio value.
So we're going to take 35,000,we're going to divide it by 4%
(09:41):
and that's going to give us$875,000.
In other words, if thisindividual had $875,000, they
could take a 4% withdrawal rate,which would be $35,000.
They could use that $35,000,add it to their social security
of $25,000 and get the full$60,000 per year that they want
to live on.
The nice thing about the 4%rule is it's assuming you're
(10:04):
going to increase yourwithdrawal for inflation over
time, so it's not saying you canonly take out $35,000 and never
increase it.
It's assuming cost of livingadjustments to keep up with
inflation over the duration ofyour retirement.
Now, the 4% rule is not a hardand fast rule.
Generally speaking, I'll see alot of people use somewhere
between 4% and 5.5% as thewithdrawal rate they're going to
use.
If you were using the 5.5% asthe withdrawal rate they're
(10:27):
going to use, if you were usingthe 5.5% withdrawal rate and, by
the way, you can't just usesomething and assume that it's
going to work you need to beinvested the right way.
You need to know what rules tofollow.
You need to understand how thisfits in the proper context of
what type of market environmentcan this support and when might
you need to make adjustments.
But if you were to use awithdrawal rate of 5.5% instead,
now all of a sudden theportfolio needed is down to
$700,000.
So you can see how thewithdrawal rate that you use.
(10:49):
You can't just pull it out ofthin air.
You can't just say I want a 50%withdrawal rate.
That's not going to besustainable, that's not going to
last for the rest of yourretirement.
But do some research,understand what withdrawal rate
is best for you and the way yourportfolio is invested and how
long you need it to last for, sothat you can apply that to your
withdrawal need and get aportfolio value.
So those are the three steps,fairly simple.
(11:10):
What are your retirementexpenses?
How much of those expenses willbe covered by non-portfolio
income and how big of aportfolio do you need to fill in
the difference?
Now, I mentioned there's somenuances.
I mentioned there's somedetails here.
Yes, this is very simple andthis is going to get you most of
the way there.
But keep in mind there are somethings that will change this,
and I want to go through a quicklist of what that will be.
First is consider uneven incomesources.
(11:31):
This all makes sense if you'reassuming that Social Security
starts right when you retire.
What about that individual thatretires at 60 and maybe doesn't
collect Social Security untilage 70?
Well, that's a 10-year gapwhere your portfolio is going to
need to do a lot more heavylifting up front and then maybe
less heavy lifting on thebackside from 70 and beyond,
where more income is coming infrom Social Security, which
(11:53):
lessens the pressure on yourportfolio.
So be mindful of that.
How do you adjust yourwithdrawal rates?
You're not just going to take astandard 4% every single year
and have a giant pay bump at age70, because that's when Social
security comes in.
You're probably going to takemore potentially in the first
few years and a lot less in thelast few years.
So how do you balance that out?
So that's accounting for unevenincome sources.
(12:14):
On the flip side, what if,instead of uneven income sources
, you have uneven expenses?
What's an example of that?
Well, maybe you don't have yourmortgage paid off when you
first retire.
So maybe the first five years,the first six years, first seven
years you still have a mortgagepayment, so you have higher
expenses in the first few yearsand then they'll start to taper
off later in retirement.
Or what if you want to travel awhole bunch in retirement, but
(12:36):
not forever, maybe just thefirst 10 years?
The first 12 years Maybe youhave a bigger travel budget up
front, but that lessens as yougrow older.
What if you have much higherhealthcare expenses later on in
retirement than you do at thebeginning?
So these are different thingswhere, yes, the simple framework
that I talked about is a greatplace to start.
You have to account for thefact that typically, your
expenses aren't the exact same,adjusted for inflation,
(12:58):
throughout retirement.
You might spend more up front,maybe even more in the back end
for healthcare expenses.
How do you account for some ofthose uneven expenses?
Another nuance here, of course,is tax considerations.
So I talked about theimportance of understanding how
much is coming in fromnon-portfolio income sources.
Well, $30,000 of income from apension is a whole lot different
than $30,000 of income comingin from Social Security, not
(13:21):
because of the dollar amount,but because of the way that's
taxed.
Social security in many statesis not taxed, and at the federal
level, a maximum of 85% of itis taxable, whereas a pension
typically 100% of that is goingto be taxed, both at the state
level depending on what stateyou're in and at the federal
level.
So the dollar amount is notwhat we're looking at as much as
(13:42):
what's that after-tax amount ofthat income, because it's not
what you're bringing in, it'swhat you're keeping.
That's ultimately going to helpyou understand how much do you
need to meet your income needsin retirement.
Along those same lines, ifyou're figuring out how much you
need to pull from yourportfolio, $40,000 being pulled
from a traditional IRA is awhole lot different than $40,000
being pulled from a Roth IRA.
One is completely taxable,one's completely tax-free.
(14:08):
So understanding the differencebetween those is important when
determining how much youactually need to pull out in
retirement to meet your needs.
And then this is a big one.
What is the impact if you'remarried?
When one spouse passes awaybefore the other, there is an
extremely high likelihood thatyou're not going to pass away at
the exact same time.
So let me use an example.
What if you're married and bothof you have a social security
(14:28):
benefit of $3,000 per month andyou want to live on $7,000 per
month.
What that means is you have$6,000 of non-portfolio income,
your $3,000 of social securityand your spouse's $3,000 of
social security.
That means you only need topull $1,000 per month from your
savings or your investments.
What happens when one spousepasses away?
Well, your Social Securitypayment gets cut in half.
(14:49):
That $6,000 of income gets cutdown to $3,000.
You still need to pay.
You still have expenses of$7,000 per month.
Maybe that goes down a littlebit after one spouse passes away
, but it's not going to be cutin half.
And what you see is, all of asudden, the difference between
what's coming in non-portfolioincome sources and your actual
expenses.
It goes from $1,000 per monthto $4,000 per month.
(15:11):
It goes up four times, whichtheoretically means the
portfolio value you would needto support each of those
withdrawal rates increases by400% as well.
So how can you account for thison the front end?
How can you account for thefact that, yes, we want to be
able to support our needs, butunderstand or be prepared for
the impact of one spousepre-deceasing the other?
(15:31):
To say, what would you do inthat instance to replace the
lost income?
So, as I hope you can see here,retirement planning doesn't
need to be incrediblycomplicated at the outset.
You should be able to get agood sense of how much you need
in your portfolio to retirebased upon just a few key pieces
of information what are yourretirement expenses, how much
will you have in non-portfolioincome sources and what size
(15:52):
does your portfolio need to beto fill in the difference?
Understanding that is going toget you most of the way there,
because once you have this planin place both the core plan to
understand some of these details, as well as an understanding of
some of the nuances, some ofthe contingencies that might
exist you can go into retirementwith a lot of confidence,
knowing that you have a plan inplace to support what you want
to do.
(16:14):
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influenced the content of anytestimonials and endorsements
shown.
Any testimonials andendorsements shown have been
invited, have been shared witheach individual's permission and
are not necessarilyrepresentative of the experience
of other clients.
To our knowledge, no otherconflicts of interest exist
regarding these testimonials andendorsements.
Hey everyone, it's me again forthe disclaimer.
Please be smart about this.
(16:35):
Before doing anything, pleasebe sure to consult with your tax
planner or financial planner.
Nothing in this podcast shouldbe construed as investment, tax,
legal or other financial advice.
It is for informationalpurposes only.
Thank you for listening toanother episode of the Ready for
Retirement podcast.
If you want to see how RootFinancial can help you implement
(16:55):
the techniques I discussed inthis podcast, then go to
rootfinancialpartnerscom andclick start here, where you can
schedule a call with one of ouradvisors.
We work with clients all overthe country and we love the
opportunity to speak with youabout your goals and how we
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And please remember, nothing wediscuss in this podcast is
intended to serve as advice.
You should always consult afinancial, legal or tax
(17:16):
professional who's familiar withyour unique circumstances
before making any financialdecisions.
We'll see you next time.
Today, I'm going to show you the three very simple
steps that you can take to knowexactly how much you need in
your portfolio to retire.
Now, even if you've gonethrough a very comprehensive
process to determine that numberfor yourself, this is still a
great process to go through justto gut check what you've done
and make sure that you'relooking at things from all
angles.
So I'm going to walk youthrough these three very simple
steps and then, at the end, I'malso going to walk you through
(00:20):
some nuances to this that couldchange things a bit.
So stay tuned for both the coreprocess to go through, as well
as some of the things that couldpotentially change this or
derail this if you're notcareful.
This is another episode ofReady for Retirement.
I'm your host, james Canole,and I'm here to teach you how to
get the most out of life withyour money.
And now on to the episode.
(00:42):
The first thing that you need todo when determining how much
money do you need in yourportfolio to retire is you need
to determine your retirementexpenses.
Now, before we talk about whatyour retirement expenses are,
let's first talk about what theyare not.
A lot of people fall into thetrap of thinking what I'm
earning today, that is theexpenses that I'm going to have
in retirement.
Let me walk you through anexample to show you why that's
not the case.
(01:02):
What you're earning today, youhave a lot of deductions, you
have a lot of taxes.
You maybe have a lot ofexpenses that aren't actually
going to be there when youretire.
Let's use an example.
Let's assume that you areearning $100,000 today and
you're trying to figure out howmuch money do you need in your
portfolio to retire.
Well, start with that $100,000,but don't use that as your
(01:29):
retirement expenses, even if youwant your lifestyle to stay the
same.
There are some things that aregoing to change.
For example, on that $100,000,you are paying payroll taxes.
Payroll taxes are also calledFICA taxes.
This is what's used to fundSocial Security and Medicare,
and that is 7.65% of everydollar that you earn up to a
certain cap.
That is going to pay that tax.
So, on $100,000 of income,that's $7,650 of expenses that
will no longer be there for youwhen you're retired.
So that's something that we canback out.
(01:50):
Let's also assume that maybeyou're saving to a 401k and
that's how you're preparing toretire.
Maybe you're saving 10% peryear of your annual salary to
that 401k.
Well, when you retire, you'reno longer saving to your 401k.
So 10% of $100,000, that'sanother $10,000 that will no
longer be there when you're notworking anymore.
Next, what if you have amortgage?
Maybe you're paying money to amortgage payment and that
(02:12):
payment is going to be gone bythe time that you retire.
So you're not necessarilytaking a pay cut, but your
expenses go down because there'sno longer a mortgage to pay off
in your retirement years, likethere is today.
Also, taxes as a whole For mostpeople.
They are paying taxes in alower tax bracket in retirement
than they are in their workingyears.
So let's quickly tie all thistogether so that you can see how
your actual retirement expensesmight be very different than
(02:34):
your expenses in your workingyears.
So you can start to see howthis is going to be different
for you.
So if we start with $100,000,as we did in this example, back
out $10,000 for 401kcontributions.
You no longer need to do thatwhen you're retired.
Now you're down to only needing$90,000.
Next, let's back out thepayroll taxes.
Again, that's $7,650 on$100,000 of salary.
(02:55):
Now we're down to $82,350.
Now let's make some assumptionsabout taxes.
Let's assume that thisindividual is filing taxes
single and they are using theirstandard deduction, which for
2025 is $15,000.
They would end up paying about$11,400 in federal taxes, before
we include state taxes.
But I'm going to leave that outbecause that's going to be
different depending on whatstate you're in.
(03:17):
And again, what we're trying todo here is we're trying to say
for this individual that'searning $100,000 in their
working years, what are theyactually spending after taxes
are taken out, after 401kcontributions are taken out,
after mortgage is taken out, sowe can see what number needs to
be replaced in their retirementyears?
So if we back out that roughly$11,400 in assumed federal
(03:37):
income taxes for this individual, now they're closer to about
$71,000 of expenses that theyhave.
Next, let's assume that theirmortgage is paid off and let's
assume that they're paying$1,500 per month in principal
and interest payments.
Property taxes remain,homeowner's insurance remains,
but let's assume that that$1,500 payment was going towards
principal and interest.
Well, if you remove that amount$18,000 per year or $1,500 per
(04:00):
month from $71,000, what youactually end up with is $53,000.
So what have we done there?
Just to tie it all together?
What we've done is we said forthis individual who's trying to
figure out how much money do Ineed in my portfolio to be able
to retire.
We are starting by asking themhow much do you have in expenses
and their expenses are nottheir income, which is a hundred
(04:20):
thousand today it's what dothey need to replace when
they're actually retired, whichwhat we've done is we've
narrowed that $100,000 down to$53,000.
Now, of course, just becauseyou're retired doesn't
necessarily mean you're notgoing to pay anything in taxes.
For the most part, there'sprobably going to be some taxes.
But just to use an example here, if this individual who now
needs to replace $53,000 ofincome, if they have $28,000 per
(04:42):
year from Social Security, so alittle bit more than $2,000 per
month if they take $10,000 fromtheir traditional IRA and
$15,000 from their Roth IRA,that is a total of $53,000 and
they would be in a 0% federalincome tax bracket.
That's due to what's calledprovisional income with Social
Security to determine how muchof that is taxable.
Plus, obviously, the Roth IRAis not taxed.
(05:05):
And then they have the IRAdistributions, but that would
fall under the standarddistribution amount or the
standard deduction amount.
So that's just a very basicexample to illustrate the fact
that once you have that $53,000,or once we have your expenses,
your actual taxes in retirementare probably going to be far
less in many cases than theywere in your working years.
So that step one is reallydetermine how much are your
(05:27):
expenses going to be inretirement.
There's two ways to do this.
There's what I'll call atop-down approach and that's
what we just did.
Start with a top-level numberthat you have today.
What is your income today?
Just your gross salary beforeany deductions, taxes, etc.
Then, from there, start pairingoff the things that will go
away in retirement.
Is that payroll taxes?
Is that a lessening of yourfederal tax bill, of your state
(05:48):
tax bill?
What about mortgage payments?
What about retirement savings?
What about other expenses thatyou have today that will no
longer be there?
Then, of course, you want toadd back things in that will be
there.
Are you going to take moretrips?
Are you going to do more thingsthat cost money that you're not
doing today?
So it's simply starting withyour top level number today,
removing what's going to go awayand adding back in what's going
(06:08):
to be there in retirement thatisn't necessarily there today.
That's a top-down approach.
It's going to be very simple.
You can probably do that injust a matter of a few minutes
and it's, for the most part,going to be approximately
correct.
A more detailed way, but a muchmore intensive and involved way,
is the bottom up approach.
The bottom up approach sayswhat is every single thing that
you're going to spend money onGroceries, utilities, your gas
(06:30):
bill, your travel, all thesethings?
Add them up line by line to seenot every single transaction
but every single category.
What do you estimate you'regoing to spend?
And you total those numbers upto get to the number that you
think you're going to spend inretirement.
I recommend both.
I recommend both.
I recommend both because I seepeople doing the bottom-up
approach and what tends tohappen is they miss a lot of
(06:51):
things.
They say, okay, yeah, I'm goingto retire, I might spend $4,000
per month in retirement,because they add up what they
can think of off the top oftheir head.
But then I say what is yourincome today?
And I might be taking home$15,000 a month in income today.
And I'll say well, that $15,000per month of income today, how
did you get to that $4,000?
And obviously there's ahumongous gap between those two
(07:11):
numbers and it makes them think,ok, yeah, when I did the
bottom-up approach, I was justthinking of what I could
remember top of mind.
So the top-down approach alsohelps you to come at this from
different angles.
But the bottom line is stepnumber one to determine how much
do you need in your retirementportfolio to retire is determine
what expenses will you have.
Step number two is to determinewhat will your non-portfolio
(07:33):
income sources be in retirement.
So once you know how much youwant to spend, what you have to
realize is that the role yourportfolio is going to play is
your portfolio is going tocreate the income to help you
spend that amount, but notusually the entire amount,
because you'll usually have thehelp of things like social
security or pension or things ofthat nature that are covering a
portion of your retirementexpenses.
(07:54):
Let's use a really simpleexample.
Let's assume that you want tospend $60,000 per year in
retirement.
Let's also assume that you have$25,000 per year coming in from
Social Security.
What does that mean?
It means that gap, that gap of$35,000, that's what we really
want to hone in on.
So, as you're looking at yourplan, start with your expenses,
which was step one.
(08:14):
That's the most involved of allthese steps.
It's probably the most timeconsuming of all these steps.
It's just to get that numberright and it's the most
important of all these steps.
Then back out any incomesources.
You will have Pension,annuities, social security,
things that are going to becoming into your bank account
automatically without requiringyou to draw down your savings or
your investment portfolio.
(08:35):
Add those things up and findthe difference.
In this example, 60,000 ofexpenses minus $25,000 of
non-portfolio income sources, inthis case social security the
gap is $35,000.
Now we can go to step three.
Step three says apply awithdrawal rate to that number
to determine what does the bigpicture portfolio need to look
(08:57):
like to create that level ofincome, not just year one of
retirement or year two ofretirement, but every single
year throughout retirement.
A common rule of thumb is calledthe 4% rule.
Now, I think there are otherways to do this, maybe even
better ways to do this in manycases, but the 4% rule is a very
widely known, well-known rulethat says if you have a
portfolio and if it's investedthe right way, you can be
(09:20):
reasonably assured that thatportfolio is going to last for
at least 30 years if you justtake 4% per year from that
portfolio.
So let's look at that.
What that's telling us is$35,000 per year.
In the example that we're using, that needs to represent 4% of
the bigger portfolio value.
So we're going to take 35,000,we're going to divide it by 4%
(09:41):
and that's going to give us$875,000.
In other words, if thisindividual had $875,000, they
could take a 4% withdrawal rate,which would be $35,000.
They could use that $35,000,add it to their social security
of $25,000 and get the full$60,000 per year that they want
to live on.
The nice thing about the 4%rule is it's assuming you're
(10:04):
going to increase yourwithdrawal for inflation over
time, so it's not saying you canonly take out $35,000 and never
increase it.
It's assuming cost of livingadjustments to keep up with
inflation over the duration ofyour retirement.
Now, the 4% rule is not a hardand fast rule.
Generally speaking, I'll see alot of people use somewhere
between 4% and 5.5% as thewithdrawal rate they're going to
use.
If you were using the 5.5% asthe withdrawal rate they're
(10:27):
going to use, if you were usingthe 5.5% withdrawal rate and, by
the way, you can't just usesomething and assume that it's
going to work you need to beinvested the right way.
You need to know what rules tofollow.
You need to understand how thisfits in the proper context of
what type of market environmentcan this support and when might
you need to make adjustments.
But if you were to use awithdrawal rate of 5.5% instead,
now all of a sudden theportfolio needed is down to
$700,000.
So you can see how thewithdrawal rate that you use.
(10:49):
You can't just pull it out ofthin air.
You can't just say I want a 50%withdrawal rate.
That's not going to besustainable, that's not going to
last for the rest of yourretirement.
But do some research,understand what withdrawal rate
is best for you and the way yourportfolio is invested and how
long you need it to last for, sothat you can apply that to your
withdrawal need and get aportfolio value.
So those are the three steps,fairly simple.
(11:10):
What are your retirementexpenses?
How much of those expenses willbe covered by non-portfolio
income and how big of aportfolio do you need to fill in
the difference?
Now, I mentioned there's somenuances.
I mentioned there's somedetails here.
Yes, this is very simple andthis is going to get you most of
the way there.
But keep in mind there are somethings that will change this,
and I want to go through a quicklist of what that will be.
First is consider uneven incomesources.
(11:31):
This all makes sense if you'reassuming that Social Security
starts right when you retire.
What about that individual thatretires at 60 and maybe doesn't
collect Social Security untilage 70?
Well, that's a 10-year gapwhere your portfolio is going to
need to do a lot more heavylifting up front and then maybe
less heavy lifting on thebackside from 70 and beyond,
where more income is coming infrom Social Security, which
(11:53):
lessens the pressure on yourportfolio.
So be mindful of that.
How do you adjust yourwithdrawal rates?
You're not just going to take astandard 4% every single year
and have a giant pay bump at age70, because that's when Social
security comes in.
You're probably going to takemore potentially in the first
few years and a lot less in thelast few years.
So how do you balance that out?
So that's accounting for unevenincome sources.
(12:14):
On the flip side, what if,instead of uneven income sources
, you have uneven expenses?
What's an example of that?
Well, maybe you don't have yourmortgage paid off when you
first retire.
So maybe the first five years,the first six years, first seven
years you still have a mortgagepayment, so you have higher
expenses in the first few yearsand then they'll start to taper
off later in retirement.
Or what if you want to travel awhole bunch in retirement, but
(12:36):
not forever, maybe just thefirst 10 years?
The first 12 years Maybe youhave a bigger travel budget up
front, but that lessens as yougrow older.
What if you have much higherhealthcare expenses later on in
retirement than you do at thebeginning?
So these are different thingswhere, yes, the simple framework
that I talked about is a greatplace to start.
You have to account for thefact that typically, your
expenses aren't the exact same,adjusted for inflation,
(12:58):
throughout retirement.
You might spend more up front,maybe even more in the back end
for healthcare expenses.
How do you account for some ofthose uneven expenses?
Another nuance here, of course,is tax considerations.
So I talked about theimportance of understanding how
much is coming in fromnon-portfolio income sources.
Well, $30,000 of income from apension is a whole lot different
than $30,000 of income comingin from Social Security, not
(13:21):
because of the dollar amount,but because of the way that's
taxed.
Social security in many statesis not taxed, and at the federal
level, a maximum of 85% of itis taxable, whereas a pension
typically 100% of that is goingto be taxed, both at the state
level depending on what stateyou're in and at the federal
level.
So the dollar amount is notwhat we're looking at as much as
(13:42):
what's that after-tax amount ofthat income, because it's not
what you're bringing in, it'swhat you're keeping.
That's ultimately going to helpyou understand how much do you
need to meet your income needsin retirement.
Along those same lines, ifyou're figuring out how much you
need to pull from yourportfolio, $40,000 being pulled
from a traditional IRA is awhole lot different than $40,000
being pulled from a Roth IRA.
One is completely taxable,one's completely tax-free.
(14:08):
So understanding the differencebetween those is important when
determining how much youactually need to pull out in
retirement to meet your needs.
And then this is a big one.
What is the impact if you'remarried?
When one spouse passes awaybefore the other, there is an
extremely high likelihood thatyou're not going to pass away at
the exact same time.
So let me use an example.
What if you're married and bothof you have a social security
(14:28):
benefit of $3,000 per month andyou want to live on $7,000 per
month.
What that means is you have$6,000 of non-portfolio income,
your $3,000 of social securityand your spouse's $3,000 of
social security.
That means you only need topull $1,000 per month from your
savings or your investments.
What happens when one spousepasses away?
Well, your Social Securitypayment gets cut in half.
(14:49):
That $6,000 of income gets cutdown to $3,000.
You still need to pay.
You still have expenses of$7,000 per month.
Maybe that goes down a littlebit after one spouse passes away
, but it's not going to be cutin half.
And what you see is, all of asudden, the difference between
what's coming in non-portfolioincome sources and your actual
expenses.
It goes from $1,000 per monthto $4,000 per month.
(15:11):
It goes up four times, whichtheoretically means the
portfolio value you would needto support each of those
withdrawal rates increases by400% as well.
So how can you account for thison the front end?
How can you account for thefact that, yes, we want to be
able to support our needs, butunderstand or be prepared for
the impact of one spousepre-deceasing the other?
(15:31):
To say, what would you do inthat instance to replace the
lost income?
So, as I hope you can see here,retirement planning doesn't
need to be incrediblycomplicated at the outset.
You should be able to get agood sense of how much you need
in your portfolio to retirebased upon just a few key pieces
of information what are yourretirement expenses, how much
will you have in non-portfolioincome sources and what size
(15:52):
does your portfolio need to beto fill in the difference?
Understanding that is going toget you most of the way there,
because once you have this planin place both the core plan to
understand some of these details, as well as an understanding of
some of the nuances, some ofthe contingencies that might
exist you can go into retirementwith a lot of confidence,
knowing that you have a plan inplace to support what you want
to do.
(16:14):
Root Financial has not providedany compensation for and has not
influenced the content of anytestimonials and endorsements
shown.
Any testimonials andendorsements shown have been
invited, have been shared witheach individual's permission and
are not necessarilyrepresentative of the experience
of other clients.
To our knowledge, no otherconflicts of interest exist
regarding these testimonials andendorsements.
Hey everyone, it's me again forthe disclaimer.
Please be smart about this.
(16:35):
Before doing anything, pleasebe sure to consult with your tax
planner or financial planner.
Nothing in this podcast shouldbe construed as investment, tax,
legal or other financial advice.
It is for informationalpurposes only.
Thank you for listening toanother episode of the Ready for
Retirement podcast.
If you want to see how RootFinancial can help you implement
(16:55):
the techniques I discussed inthis podcast, then go to
rootfinancialpartnerscom andclick start here, where you can
schedule a call with one of ouradvisors.
We work with clients all overthe country and we love the
opportunity to speak with youabout your goals and how we
might be able to help.
And please remember, nothing wediscuss in this podcast is
intended to serve as advice.
You should always consult afinancial, legal or tax
(17:16):
professional who's familiar withyour unique circumstances
before making any financialdecisions.
We'll see you next time.
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