Stop Spending Your Retirement Money and Do This Instead

  by Shelley Seagler

How much money do you need to retire?

Whatever number just popped into your head, it’s probably not enough.

Conventional investment advice says that after 30 or 40 years in the workforce saving 10% of your income annually, you should have enough money to be able to withdraw 4% of your fund balance every year for the remainder of your retirement.

But this assumes that retirees have:

  • Made significant enough money during their working years so that 10% would leave them with a significant balance.
  • Chosen stocks and bonds that will yield high enough returns every year throughout their retirement so that 4% can sustain their lifestyle.

Unfortunately, both of these things may not be the reality of your situation. You may end up spending through your retirement funds much earlier than anticipated if you stick with this advice. Here’s why…

Use this Retirement Income Gap worksheet to calculate your livable income

Retirement Income

10% and 4% Won’t Be Enough

Let’s say that you’ve followed conventional advice, and that after 30 or 50 years in the workforce you’ve amassed a nest egg of roughly $500,000. You’re not a millionaire, sure, but half a million is nothing to sniff at.

But using the 4% rule, your half a million dollars will actually provide you with less than $23,000 a year in income before taxes. That’s assuming you don’t live more than 20 or so years after retirement.

So what happens if you want to make more than $23k a year? What happens if you live more than 20 years?

Sadly, conventional advice doesn’t leave you with many options. Either you’ll have to save up more before you retire to have a larger nest egg (and if you’re close to retirement already, that’s not much of an option), or you’ll have to live off of less, or simply resign yourself to running out of money sooner. None of which are very appealing.

So what should you do to make sure you don’t overspend your retirement money?

Determine Your Actual Income Needs

The first thing you should do is be honest about the amount of money you will actually need to live on during retirement. No one can tell you what this figure will be, as spending habits, goals, and income needs will be unique to every person. You’ll need to calculate that percentage based on your overall financial goals.

But instead of relying on a certain percentage, you’re better off taking a comprehensive look at your financial situation to calculate your potential income gap in retirement. You should first add up your pension, Social Security and any part-time employment income, and subtract your expenses. What’s left is your income gap.

You should also factor in variables such as vacations, travel, gifts, or other leisure activities where costs could add up rather quickly. Many retirees end up replacing their work lifestyles with more active (and more expensive) ones without planning for the additional costs.

Enjoy Retirement

You may find that you don’t actually need as much money in retirement as you thought, though in our experience most retirees underestimate how much they will end up spending (don’t forget about those expensive vacations!) and how long they will actually live.

This is where having a realistic view of your retirement goals will be important. You want to make sure that your financial plan not only covers basic living expenses, but also things like leaving a legacy to your children, any healthcare costs, and yes, even those luxurious vacations.

But what happens if you’re not exactly sure how much money you will need? There are a few ways you can cover your bases so that you don’t have to worry about running out of money in retirement.

Calculate Your Withdrawal Percentage

In terms of calculating how much money you will need, you will need to be aware of two things: how much income you need to live comfortably (which we’ve talked about) and how to make that money last as many years as you need it to.

One of the biggest fears for most retirees is running out of money after a few years of living at their desired budget.

So if you’re not already a multimillionaire by retirement, your goal should be to withdraw money from your portfolio on a regular basis and at a rate that matches your desired income (which may be more than 4%) regardless of the size of your nest egg.

A simple, back-of-the-napkin way to calculate your ideal return rate is to take the amount you need to withdraw from the portfolio in retirement plus inflation divided by one minus your marginal tax rate. (Read more about that here).

Be Confident in Retirement

Once you know how much you need to withdraw, the next step is to build a portfolio that will generate consistent and reliable income at that percentage. The best way to do this is through cash flow investing.

Instead of investing in stocks and bonds that may (or may not) appreciate depending on the market, as a Snider Investment Method investor you’ll be using a combination of stocks, options, and other forms of cash management that will produce a higher yield while managing risk.

As a cash flow investor you can withdraw amounts higher than 4%, and you won’t be dependent on a “good” market to make money – you can generate income whether the market is up, down, or sideways.

Keep in mind that while contributions to your retirement plan may stop when you reach retirement, it doesn’t mean your portfolio needs to stop growing, too.

If you plan your needs accordingly and use income-based investing solutions, your portfolio should actually continue to provide you with reliable income for the remainder of your retirement years, even if you take a vacation or two.

This Income Gap Worksheet will help determine your withdrawal percentage

Final Thoughts

Although it’s best to calculate your needs and come up with an investment strategy before you hit retirement age, remember that it’s never too late to course correct. It’s probably (and recommended) for those who are already retired to grow their portfolios and use income-based investing to meet their needs.

Make sure you understand just how much money (after taxes) will make you comfortable after retirement, and understand that you may need a withdrawal rate higher than 4% if you want to meet that (especially if you decide to live to 100).

Once you know what you want, it’s fairly straightforward to design a portfolio that generates the income you need using the Snider Investment Method. If you want to learn more about how to manage your portfolio in this way, don’t miss our free instructional courses.

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