*
 *

~When can you retire?~

 

How, and when, do you know it's "safe" to retire so that you don't run out of money?  This can seem like an overwhelming question, but with some well-thought-out planning, it can actually be a lot simpler than you might think.

 

Spending

Start here.  How much do you anticipate spending in retirement?  T. Rowe Price recommends starting with 75% of your current spending (https://tinyurl.com/whab3e8z).  Retirees tend to spend less in retirement.  For example, you may have your mortgage paid off by retirement.  Secondly, if you are currently saving for retirement, you won't be doing that anymore, so, effectively, your spending needs will be lower.  And lastly, if your income is lower in retirement, your tax bill will likely be lower.  Of course these are all just rules of thumb.  For example, if you are retiring before age 65, you will have to factor in health insurance costs, which can be a significant expense.

 

Income

Next, figure out what non-portfolio income sources you will have in retirement.  How much will your pension be (if you have one)?  How much will you get in Social Security (if anything)?  Will you have a part-time job?

 

 

Portfolio

Once you subtract your income from your spending, now you know what the gap is.  Let's say you anticipate spending $70,000 per year.  And your pension will bring in $50,000 per year.  Now you know that you will need to pull $20,000 per year from your portfolio to supplement your income.  The next question is really important:  How big of a portfolio do you need so that you can safely pull $20,000 per year from it without running out of money?  This is where a good financial advisor can help you, but for illustrative purposes, let's say you decide that you can safely pull 5% per year from your portfolio (this is not a recommendation and this depends greatly on the construction of your portfolio and market conditions).  In this example, now you know that you need a portfolio of $400,000 by the time you retire.

 

Planning

Let's say, based on this scenario, that you are a few years out from retirement and are already close to a $400,000 portfolio.  Now you know that you can, potentially, just rely on the expected growth in your existing portfolio to reach $400,000.  This could allow you to stop contributing to your retirement accounts and enjoy more of your money now.  On the other hand, if you are well below $400,000, now you can figure out how much you need to contribute to your portfolio to reach that figure by the time you want to retire.

 

The more you can think through these steps, the more concrete, and the less stressful, thinking about retirement can be.

 

--------------------------

October 3, 2024

**Please note that the commentary and newsletters presented on this website do not constitute advisory services provided by Educated Investors LLC and are not indicative of performance returns for any of our clients.  This newsletter is for educational purposes only and should not be construed as a recommendation for specific individuals to purchase any particular security or portfolio of securities, or to pursue any transaction or investment strategy.  Any reference to a specific security, portfolio, strategy, or related performance data, is not an endorsement to buy or sell that particular security or to pursue that strategy.  Individuals should never rely on a single chart, graph, or statistic for investment decisions and should always consult the appropriate financial, legal, and tax professionals when making decisions.  Please click here for complete disclosures regarding the information provided in the newsletters on this website.**

 *
 *

Contact us:

Scarborough, Maine