It's hard to pick a retirement date without knowing how much money you'll need in order to successfully retire. Whether you are 2 years or 20 years from your hoped retirement target, planning ahead is a must.
We can use a simple model to help us identify the minimum invested amount we would need in order to retire successfully. This article will describe the three step process to identify that amount, as well as other factors to consider when selecting your retirement deadline.
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It doesn’t matter if you are 1 year from retirement or 30 years from retirement.
You should still do your best to estimate how much you will need to spend each eyar in retirement.
There is NO RETIREMENT PLAN without having a working estimate of how much you will need to spend once you retire/stop working.
A suitable way to estimate your retirement expenses is to multiply your current annual spending by 80%-90%.
Use the higher number the further you are out from retirement.
You can also use a budgeting tool such as Everydollar or Mint to help identify a more accurate estimate of spending.
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Next you’ll estimate your income from the following sources.
Guaranteed Income sources are things like pensions, social security, annuities.
These are retirement income sources that are guaranteed and reliable and do not require you to PAY YOURSELF.
Variable Income sources include things such as part time work, rental property income, or dividend income.
Any source of income that may fluctuate based on conditions outside your control - but that does not require you to SELL SOMETHING in order to obtain access to the money.
Add these income sources together and then move on to step 3.
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Your required portfolio income will be the gap between the amount you desire to spend in retirement and the guaranteed + variable sources of income you will have in retirement.
For example if your desired expenses in retirement are $6000 a month and you have combined income (excluding portfolio assets) of $3500 a month, you have a gap of $2500 per month that must be made up via saved assets (your portfolio).
In the above example, the annual required portfolio income will total $30,000 ($2500 x 12 months).
Now we can move to step 4.
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The standard financial planning estimate of life expectancy is 30 years for an individual retiring at age 65. You should choose a life expectancy estimate that you are comfortable with based on family health history, personal health, and a firm understanding of average life expectancy in your jurisdiction.
Continuing our example from above; applying a 30 year life expectancy and a $30,000 annual required portfolio income, we would arrive at a minimum required portfolio of $30,000 x 30 years = $900,000.
With a portfolio of $900,000, you would be able to support level equal payments of $30,000 per year for 30 years of retirement.
Understand - this is not a complete estimate. You will also need to factor in a loss of purchasing power over time due to inflation, rising cost of living, rising health care costs etc.
You will also need to identify a required investment rate of return and the accompanying portfolio construction that will support you through that 30 year retirement.
Those can be more complex to model - but using the simple framework detailed here can help you set a savings target.
There are online software tools that can help you apply an inflation factor and fill in other gaps if you prefer to build this model yourself.
For those of you that prefer to rely on an expert, we recommend working with a Fee Only Fiduciary Financial Advisor to create a more robust model, along with the savings and investing plan that would support it.
Click here to schedule a free no obligation consultation with our Fee Only Fiduciary Financial Planning team.
If you’d like to see the main considerations that we use when building a retirement plan for our clients at peak financial planning, you can watch this free training called “The secret retirement plan big finance does not want you to know about”.
You can also schedule a free retirement plan consultation with us using this link here.
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