If you have enough money in the bank to last the rest of your life, you can retire. If you don’t, you can’t. It’s as simple as that, although, of course, nothing about retirement is actually simple. Planning out your retirement means making educated guesses about issues well outside your control, from how the market will play out to how long you’ll even live. But that doesn’t mean this is completely up in the air. How you should plan for your retirement depends on your personal choices, your lifestyle and your spending. You may want to consult with a financial advisor to see how much you are going to need to retire.
Spending in Retirement
There are basically two variables when it comes to predicting the longevity of your retirement account: income and drawdown. We’ll get to the income side in a moment, but first, let’s look at your spending. Basically, how much money will you take out of this account every year?
This is where retirement planning gets very personal. It depends entirely on your needs, lifestyle and personal preferences. A few of the most important issues to consider are:
Housing and Location
Where do you live and how much will you need to spend each month on housing? For example, do you live in a home that you own and have paid off? In that case, you can expect relatively low housing costs, likely based on property taxes and periodic maintenance. Or do you rent an apartment in a major city? In that case, you can expect to spend a lot on housing. In fact, it might be the single biggest line item in your budget and it will grow every year.
As you age, medical spending will become an increasingly important part of your lifestyle. As we note below, Medicare will cover a decent portion of this, but the program is far from comprehensive. At a minimum, you should plan on carrying supplemental insurance and long-term care coverage. This will add to your expenses and it’s spending you should plan on.
Dependents and Others
Do you have anyone who depends on you? For example, do you have children or aging parents? Is there anyone in your life who counts on you? Their needs will factor heavily in your budget, so make sure to prepare for that.
How do you want to live in retirement? In particular, these days travel has become a popular option for retirees. Others like to enjoy sports and other potentially expensive hobbies. No matter what you’re interested in, make sure to account for how much it will cost to maintain the kind of lifestyle you’re interested in.
If you’re sitting on this kind of money, you may well be considering early retirement. As we discuss below, you certainly have the spending power to do so. While that won’t necessarily change the result, it can completely change the math on your retirement plans. You might need to budget for major life events (like college and new houses) that an older retiree will never face. You will certainly add decades to the length of your retirement and likely the more expensive lifestyle of youth. This isn’t a bad thing, but it’s important to keep in mind.
Inflation and Taxes
Sadly, we must also address less pleasant spending. Over the course of your retirement, inflation will take a significant bite out of your spending power. In general, at the Federal Reserve’s benchmark 2% inflation rate, it takes about 35 years for prices to double. So it’s important to plan on keeping your withdrawals consistent with inflation. At the same time, taxes will take a big bite out of those retirement withdrawals, at the income tax rate or the special lower rate reserved for capital gains depending on how you structure your portfolio. Either way, this will reduce the value of your retirement account.
Investment and Growth
That’s the spending side of the equation, how much you take from your portfolio and how quickly. Now for the good news: Retirement accounts are not all about spending. Even though retirees almost always shift to a more conservative position, you will almost certainly keep your money in some sort of investment rather than just sitting in cash. That means growth, which can help your retirement account keep up with spending, taxes and inflation.
The even better news is that, with $8 million, you can maintain all but the most lavish of lifestyles indefinitely. Let’s look at a few very broad investment profiles to see how this would play out.
Cash (Effectively 0%)
Do not do this, but let’s say you migrate your entire portfolio over to cash. For example, you keep it in a savings account earning at or around the rate of inflation. In this case, you will simply withdraw money periodically and your savings will shrink as you age. This will give you a long retirement to the point of being functionally indefinite depending on how much you choose to withdraw and when you retire. For example, say that you withdraw $150,000 per year, a comfortable income almost anywhere. You can live for more than 50 years before you start hitting the end of your savings.
Bonds (Average 5%)
This is the benchmark security investment. For many retirees, it’s common wisdom to shift their portfolio mostly or entirely into bonds by the time they reach retirement age. This will give them modest growth while reducing the risk of loss as much as possible. Treasury bonds tend to pay around 4% for a longer-term asset, while on average creditworthy corporate bonds tend to pay between 4% and 5%.
At that rate of return, you probably won’t even need to worry about selling assets over time. You can withdraw more than $25,000 per month or $300,000 per year and your portfolio will still grow faster than your withdrawals. This gives you an indefinite retirement.
Stocks (Average 10%)
Maintaining a stock portfolio is more complicated. Say you invest entirely in the S&P 500, you simply buy a series of index funds. You could expect an average annual return of around 10% – 12%. Since this portfolio would be based on capital gains, rather than interest and income, you would also pay less in taxes.
Overall, this would give you far more growth and spending power than with a bond portfolio. In fact, you could withdraw more than $50,000 per month on average ($600,000 per year) and the returns on your account would grow faster than your withdrawals. This would give you an indefinite retirement.
But it’s that “on average” that’s critical. The stock market is volatile. Some years post slower growth and some years even take a loss. To make this strategy work you would need the flexibility to withdraw less money, even none at all, depending on the market year. Ideally, this means keeping a secure emergency fund on hand that you can tap into so that you don’t have to sell depressed assets. If that’s an option for you, then stocks might be the way to go. If not then bonds or diversification are probably better choices.
Social Security and Medicare
The truth is, Social Security and Medicare probably aren’t important to your retirement planning. For most retirees, these two government programs are an essential part of preparing for the future. Social Security is a critical income replacement program for the average household, while Medicare provides important health care coverage for older Americans. This is true for people with ordinary income and retirement accounts.
If you have an $8 million portfolio, however, this will almost certainly not apply to you. The average Social Security payment of $1,750 per month simply won’t move the needle on a portfolio that can generate $25,000 – $50,000 in monthly income. Similarly, that kind of money is more than enough to pay for top-quality medical insurance even aside from the benefits and guarantees of Medicare.
These programs will add a nice boost to your retirement, at least past the age of 65. Social Security will give you some extra money and Medicare will save you some. Neither, however, is important to the question of whether and when you can retire, as your portfolio will generate more than enough income to pay for a comfortable retirement indefinitely.
With $8 million in savings, even a modestly invested portfolio can generate enough money to live a very comfortable life indefinitely. Of course, that’s all relative as the amount of money you need in retirement is going to vary based on an individual’s life choices and desires. It’s important to understand your own retirement needs before determining whether you’ll have enough to retire on or not.
Retirement Planning Tips
- This is a strong retirement account and you should be proud of yourself for building it. Now, it’s also important to plan for how you will distribute it after you’re gone because there’s almost certainly going to be plenty left.
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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