There are some eye-opening insights into the magic number for your dream retirement in 2024. Whether you’re already in the planning stages or just dipping your toes into the world of financial independence, understanding the dynamics between your expenses and portfolio is key.
In this post, I delve into two real-life client scenarios to illustrate how seemingly small differences can have a profound impact on your retirement journey. For simplicity, let’s call the first couple Bill and Susan and the second couple Tim and Sally. Their stories highlight the pivotal role that Social Security and other income sources play in determining the sustainability of your retirement portfolio.
Bill and Susan’s Scenario: The Pitfalls of High Withdrawal Rates
Bill and Susan, both 62, dream of retiring and living comfortably on $7,500 per month. They have a combined retirement portfolio of $1 million, and their only income sources are Social Security benefits, each receiving $2,000 per month. The catch? They plan to start tapping into their portfolio early, withdrawing almost 7% annually.
As we fast-forward through the years, it becomes evident that their portfolio is projected to run dry by their early 80s. Despite still having a home and Social Security income, a significant shortfall looms.
Tim and Sally’s Scenario: A Lesson in Social Security Optimization
Now, let’s shift our focus to Tim and Sally, a couple aged 67, aiming to retire at 67 with the same $7,500 monthly goal. Like Bill and Susan, they also have a $1 million retirement portfolio and a home. The twist? Tim and Sally plan to start their Social Security benefits later, each receiving $3,000 per month.
What happens when we compare their projected scenarios? Despite starting Social Security later, Tim and Sally’s higher benefits mean they need less from their portfolio to maintain the same lifestyle. With a more sustainable withdrawal rate, their portfolio is projected to continue growing well into their golden years.
Cracking the Retirement Code: Two Vital Questions
There are two questions to examine:
1. What are Your Retirement Expenses?
Determining your retirement expenses can be daunting, but it’s a crucial step. You can take a bottom-up approach, meticulously listing every expense, or you can take a top-down approach, basing your retirement income on your current monthly needs.
2. How Much of Those Expenses Come from Your Portfolio?
Understanding the interplay between your income sources (Social Security, pensions, etc.) and your portfolio is key. The less you need from your portfolio to cover your expenses, the more robust and sustainable your retirement plan becomes.
The Retirement Number Equation: A Simple Guide
To calculate the portfolio value you need for retirement, follow these steps:
- Determine your annual portfolio needs (e.g., $40,000).
- Choose a withdrawal rate (e.g., 4%).
- Divide the needed amount by the withdrawal rate (e.g., $40,000 ÷ 0.04 = $1 million).
Remember, your portfolio should complement your existing income sources, creating a sturdy foundation for your retirement years.
Knowing your retirement number isn’t just about finances; it’s about life balance. With this crucial piece in place, you can make informed decisions about work duration, mortgage payments, and current expenditures.
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