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The Most Important Principle to Know About Retirement: How Much Money Can I Expect to Live Off Each Month?
Retirement is one of life’s most significant milestones, and knowing how much money you can expect to live off each month is crucial to ensuring a secure and enjoyable future. Whether you’re nearing retirement or just beginning to plan, understanding this principle is key to making the most of your golden years. This article will help you navigate these important decisions by exploring the relationship between your monthly expenses and the assets you’ve accumulated over the years.
Before diving in, it’s important to note that the following analysis does not account for Social Security benefits, pensions, or other potential income streams. These sources of income can play a significant role in your retirement and should be factored into your personal financial planning.
Understanding the Basics: Expenses, Assets, and Withdrawal Rates
To determine how much money you can live off each month in retirement, you need to consider three main factors:
1. Monthly Expenses: The amount you plan to spend each month in retirement. 2. Assets: The total savings and investments you have at retirement.
3. Withdrawal Rate: The percentage of your assets you withdraw each year to cover your expenses.
Let’s start by examining a specific scenario.
Scenario: $3,000 Monthly Expenses and $500,000 in Assets
Imagine you’re retiring at 65 with $500,000 in assets and expect to live until 90. You estimate that you’ll need $3,000 per month before social security and or a pension to cover your expenses. Here’s how this scenario plays out:
• Monthly Expenses: $3,000
• Annual Expenses: $3,000 x 12 = $36,000
• Retirement Duration: 25 years (from age 65 to 90)
• Initial Assets: $500,000
• Expected Rate of Return: 4% annually (adjusted for inflation)
Calculating the Withdrawal Rate
To cover $3,000 in monthly expenses, you need to withdraw $36,000 annually from your $500,000 nest egg. This results in an initial withdrawal rate of 7.2% ($36,000 ÷ $500,000).
As financial advisors we often recommend a withdrawal rate of around 4-6% to help ensure your savings last throughout retirement. A 7.2% withdrawal rate is considerably higher, which raises concerns about whether your assets will last the full 25 years.
How Long Will Your Assets Last?
Using a 4% annual return assumption, let’s see how your $500,000 in assets would hold up: Year 1:
• Starting Assets: $500,000
• Withdrawal: $36,000
• Remaining Assets: $500,000 - $36,000 = $464,000
• Interest Earned (4%): $18,560
• Ending Assets: $464,000 + $18,560 = $482,560
Year 2:
• Starting Assets: $482,560
• Withdrawal: $36,000
• Remaining Assets: $482,560 - $36,000 = $446,560
• Interest Earned (4%): $17,862
• Ending Assets: $446,560 + $17,862 = $464,422
Following this pattern, your assets will continue to decrease each year. With a 7.2% withdrawal rate, your $500,000 could be depleted in about 19 to 20 years—leaving you with a potential shortfall if you live until 90.
Exploring Different Scenarios: What If Expenses or Assets Change?
To better understand how different factors affect your retirement, let’s look at what happens when you change your monthly expenses or initial assets.
Scenario 1: $500,000 in Assets
Scenario 2: $750,000 in Assets
Scenario 3: $1,000,000 in Assets
Filling the Gaps: The Impact of Additional Savings
If your assets and expected withdrawal rates suggest that your funds might not last throughout
retirement, additional savings can help fill the gap. Even modest monthly savings can make a
significant difference over time.
Impact of Additional Monthly Savings
Assume you start saving an additional $100, $500, or $1,000 each month at age 55 and continue
until retirement at age 65, with a 4% annual return:
These additional savings can extend the life of your retirement funds, reducing the need for higher withdrawal rates or allowing for a more comfortable retirement.
It's Never Too Late
If you’re feeling uncertain about your retirement readiness, take heart—it's never too late to make a positive impact on your future. Whether you’re a decade away from retirement or just a few years out, there are steps you can take to improve your financial situation. Increasing your savings,
adjusting your spending habits, or making strategic investment decisions can all contribute to a more secure and enjoyable retirement. Even small changes can add up over time, helping you fill any gaps in your retirement plan and providing you with greater peace of mind as you approach this exciting chapter of life.
The Value of Hiring a Financial Advisor
The five to eight years before retirement are some of the most critical in your financial life. Decisions made during this period can have a profound impact on your retirement security. Hiring a financial advisor during this time can be the key to optimizing your retirement strategy.
An advisor can help you:
• Analyze Income Sources: Including Social Security and pensions.
• Adjust Investments: To balance growth and protection as retirement nears. • Plan Withdrawals: To minimize taxes and maximize the longevity of your assets. • Create a Comprehensive Retirement Plan: Tailored to your specific needs and goals.
By working with an advisor, you can ensure that you’re making the most of your savings, preparing for all eventualities, and entering retirement with confidence.
Please reach out to us at Intermountain Wealth Management if you feel you question whether or not you have enough to retire.
Conclusion
Understanding how much money you can expect to live off each month in retirement is the most important principle to grasp as you plan your future. By considering your monthly expenses, assets, and withdrawal rates, and by taking steps to fill any gaps with additional savings or professional guidance, you can secure a comfortable and sustainable retirement. Don’t leave your financial future to chance—plan wisely and seek the help of a financial advisor to make the most of your retirement years. Remember, it’s never too late to make a difference in your financial future.
Intermountain Wealth Management is a Registered Investment Adviser (RIA). The company manages several fee-based portfolios comprising various equity and fixed-income investments that may include stocks, mutual funds and exchange traded funds. Intermountain Wealth Management serves as a fiduciary to all clients. Intermountain Wealth Management is also an ERISA 3(21) fiduciary. This is not a prospectus or an offer to sell any security. Please read the prospectus of any investment before you invest. The information included here is intended for education and information purposes only.
