How Much Can YOU Spend In Retirement? | Episode 9

Retirement spending is not a one size fits all approach. There are many different things to think about when it comes to spending your portfolio down in retirement. How much guaranteed income do you have, what are your other income sources in retirement, what do you want retirement to look like, how much do you need to sustain your lifestyle and how much is in your portfolio. This video covers things to keep in mind when it comes to retirement spending.

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Transcript

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One of the most common questions that I hear from people as they are approaching or starting to think about retirement is how much can I spend? Not how much is my balance, how much do I have in my portfolio, right? They can log in and they can see that. But they really want to know how much can I spend? And that is the right question because building a portfolio and investing and saving throughout your working career, that's one thing. But retirement is about flipping the switch. It is going from saving to spending, it is going from accumulation to decumulation. How do you turn your portfolio into income? And people want to know as they're approaching retirement is how much can I safely spend in retirement without running out of money? So in this video, I want to talk about things you should be thinking about as it pertains to spending as you start to approach retirement. Many people think of retirement spending as a very simple formula. I have $2 million saved, I want to spend $100,000 a year, times that by $25. I should have $2.5 million, I only have $2 million, I need to keep working. But the problem is your account balance and your 401k, your IRA, your taxable brokerage accounts, those don't tell you the full picture. Someone with a $2 million portfolio, but also has a $50,000 a year pension is in a different position than someone with a $2 million portfolio and no other retirement income. Someone who is planning to claim Social Security at $62 versus full retirement age versus delaying until 70 has different needs. Someone who is planning to retire before Medicare age has a built-in additional health care cost that they have to be thinking about for spending in retirement. Someone who wants to spend $75,000 a year versus someone who wants to spend $200,000 a year obviously have different spending needs and different portfolio goals in retirement. This is why retirement spending is more personalized than people think. But before we talk about investments, you need to answer a couple questions to help you understand what will your spending in retirement look like? Will you travel frequently? Will you stay in your current home? Will you maybe buy a second home? Will you help out some children? Will you help out your grandchildren? Will you spend more money on different hobbies that you have? Will you work a part-time gig just because you want to, or maybe because you have to? What do you want your retirement to look like? How do you want it to play out? Because when people retire, most of the time they end up spending less or maybe spending more than they had originally planned. And spending is not the same every single year. Some years you might need a new vehicle, some years you might want to go on a bigger vacation. So spending is usually not stagnant the same every single year. It fluctuates. Most retirees end up spending more early on in retirement because maybe they're healthier, their body allows them to, they want to see the world. They just retired after working for 30 or 40 years. They want to travel. And so you spent so most retirees end up spending more in their early years, but then in their later years of life, maybe their health declines, they can't travel as much, they're not as mobile, so they end up spending less later on in life. That is why retirement planning and retirement spending isn't just one magic number. It really depends on your specific goals and your lifestyle. Another mistake I see is people forgetting to account for their guaranteed income. Whether that's Social Security or a pension from your job. But let me give you an example. Let's say someone wants to spend $90,000 a year. If their Social Security provides them $40,000 a year and a pension from one of their jobs provides them another $20,000 a year, well then to make up that difference, their portfolio only needs to provide $30,000 a year of income. That is a very different need than someone else who might only have a Social Security benefit of $30,000 and no fixed income. Well, their portfolio needs to provide $60,000 a year. So even though they want to spend the same amount per year, when you factor in their guaranteed income, the portfolio needs are different. So before you worry about the portfolio number, don't forget to think about things like Social Security, pensions, rental income, or other fixed income sources that you might have in retirement. Once you understand your spending needs and income sources, now we can focus on the portfolio and figure out what that needs to provide. So let me give you an example. Let's say someone wants to spend $100,000 a year in retirement. Social Security provides them $45,000 a year. That means their portfolio needs to provide $55,000 of income to meet their spending needs. And their combined portfolio values are $1.5 million. They are withdrawing about 3.7% per year out of their portfolio. However, if they only had $800,000 in combined portfolio value, they would be withdrawing about 6.9% out of their portfolio. And with that larger withdrawal rate, the more pressure that you're putting on your portfolio, then it might be able to withstand. Now, side note, with spending 3.7% per year, and if that stays consistent throughout their planned retirement, I might challenge them that they're not spending enough money in retirement. That would be a conversation for a different video, but they might be underspending at 3.7% per year. And this withdrawal rate probably changes year by year. Just like I said, most retirees don't spend the same amount every single year. Sometimes there's high spending years, sometimes there's low spending years. So on a year-to-year basis, looking at how much are you pulling out of your portfolio in retirement? It is all about creating flexibility from your portfolio to sustain the lifestyle that you want to have in retirement. People think that retirement spending is all or nothing. Either I spend this much every single year or that's it. In reality, successful retirees tend to adapt. If they have to pull back spending for a couple years to let their portfolio recover, which there's ways to do that with bucketing approach, if they have to do that, they can adapt. If they have the ability to increase their spending because the market's done well, they can adapt. That is what can help build a successful retirement plan is the ability for flexibility, but also adapting where needed. Another thing we can't forget about is taxes. Uncle Sam wants his peace depending on where your money is at. For most people that are close to retirement in 2026, most, if not all, of their money has yet to be taxed. It is in traditional or pre-tax accounts. That means $2 million in a traditional IRA is not $2 million that you can spend. Uncle Sam is going to want his piece at some point. So sitting down with a financial planner like myself to talk about your potential tax liability that's coming your way and how do you plan for that? How do you create flexibility with where you would draw your money from a tax perspective can be huge. Those small tax decisions that you make today can have a meaningful impact over your retirement that might last 20 to 30 years. Another mistake that I see as it pertains to spending in retirement is inflation, but not accounting for inflation. When you're building out a retirement plan, you want to make sure that you have a built-in mechanism for accounting for inflation. Because as we all know, a dollar today is not worth the same as a dollar tomorrow. So with your spending goal that you need from your portfolio, is inflation being accounted for? Or in your guaranteed income sources, let's look at Social Security, for example, they have built-in cost of living adjustment. If you have a pension, does it have a cost of living adjustment or is it a fixed amount for the rest of your life? So making sure that you're accounting for inflation in retirement, because yes, things will get more expensive as you get older, and how are you accounting for them? And you can even take it a step further and say my medical costs will inflate at a different rate than my spending. Maybe my medical costs inflate at 5% per year for costs, but my spending amount, the amount that I want to spend for my portfolio, is going to be inflated at 3% per year. So a mistake that I see is not accounting for inflation. So the answer to how much you can spend in retirement is it depends because it depends on you. It is not one size fits all, but there is a process. And for most people, the goal is not to have the most amount of money when you die. The goal is finding a spending level that allows you to live the lifestyle that you want without having fear of running out of money. That is exactly the type of work that I do with my clients. So if you are asking yourself, hmm, how much can we spend in retirement? We've spent the last 35, 40 years working, saving, putting money for retirement. We're within five or 10 years until retirement and we don't even know how much we can spend. How much can we spend in retirement? If that is you, then you are asking one of the most important questions in financial planning. And unfortunately, the answer will not be found on your account statement that shows the balance. It is found by understanding your spending goals, your lifestyle goals, your income sources, your account balances, taxes, and how all of these work together to build out your retirement plan. And if you're within five to ten years until retirement, now is a good time to start running those numbers. Because the more clarity you have before retirement, the more confident you will be in your retirement when you get there. Thank you so much for watching, and I'll see you in the next video. The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual to determine which strategies or investments may be suitable for you to consult the appropriate qualified professional prior to making a decision.