Recently, we held a pre-retirement webinar for those anticipating retiring in the next 5-10 years. For those who missed the event, we wanted to share the five main points Barry touched on during the webinar. This week, we visit the question, “How much money do I need to retire?” We hope you enjoy the series and find value in its contents.
Read the full transcript below.
“ It’s not unusual to see one person take care of all the finances . When you start getting to the retirement planning discussion, those boundaries need to cease to exist. It’s critically important that both members of the couple be involved in the planning, education and understanding. ”
Transcript
Austin: Hey guys, this is Austin. Recently, we recorded a pre-retirement webinar that we held with some of our clients. Each week, for five weeks, we're going to walk through one of the five main questions that Barry covers in the webinar. Last week, we talked about what you're going to do with your time during retirement. This week, we want to talk about how much money you need to retire when you'd like to. So, with that, I'll turn it over to Barry. Enjoy.
Barry: The second question that I want to know is how much money you're going to need to retire. Now, there's several questions inside of this, and one key point that I want to make in starting. Retirement is a key sport. What do I mean by that? I mean, most households are made up of couples. Couples, most are married, some are not, but most are couples. Usually in those couples, one person has an affinity for financial stuff or a great interest in it. It's not unusual to see one person take care of all the finances. When you start getting to the retirement planning discussion, those boundaries need to cease to exist. It's critically important that both members of the couple be involved in the planning, education and understanding.
Let me share with you a story of one of the most difficult client interactions or personal interactions I've had professionally in this business several years ago. One of the advisors in our office was out on medical leave. One of his clients passed away unexpectedly. His widow comes into the office. Now, he had not had her involved in anything financially during the marriage. So, she was not only dealing with the sudden loss of her husband. She didn't know where to go, where to go, to find out how much money they had, who to contact, etc. And she was furious. She was mad at me, I just was the person that was receiving her anger and frustration. It just made such an impression on me that ass you go into this process you make sure that both people are involved. There cannot be any “well that's hers” or “that's his”. It needs to all be considered together and make sure that everyone's involved. Everybody knows who your key contacts are, whether it be your accountants, your attorneys, or your financial advisors. It's a very important point.
The second point under how much do I need to retire is you really need to know what your needs are. Do you know what it really costs you to live, and not just, gosh, I think it costs me three or $4,000 a month. You really need to know definitive answer. If you don't, then I'd say you need to step back and look at your bank statements and your credit card statements for at least the last three to six months. Be very specific, write everything down, categorize everything, and then prioritize from those that I have to have the live food, utilities, water, those types of things.
Then, you categorize your discretionary expenses. How many times do we go out to eat? You really do need to understand what it costs you to live. If you haven't done that, it’s very important to do that step, then review your sources of income. And I would break your sources of income up into a couple of different ways.
One is your certain sources of income. Under certain sources of income, I'd say you'd look at things such as pensions. Some folks still have those. Do you have annuities that will pay out a certain stream of income over time? Social security would fall into that category, your certain sources of income that, you know, are going to be pretty reliable. It's going to happen every month, same time, same amount.
Then, there are going to be those variable sources of income. It might be rental income from properties or farm income. If you have a farm, and you generate income off the farm, we know that can fluctuate. The other part of that variable income is the income that you can derive out of your investments: The money that you save through company sponsored retirement plans, non-retirement accounts, or your savings.
If I'm going down my list, I'm thinking I'm going to go back and say, I need $5,000 a month to live. I know that is what my number is. To live comfortably, I need $5,000 a month. From certain sources, I know I'm going to get $3,000 a month., then from my uncertain sources, I need to change generate $2,000 a month.
That's where I would go into the next concept. From a investment income standpoint, there's two different ways to look at this. One would be, if I have accumulated enough investments that I can simply live off of the income for most investments, that's an ideal position. Most people are not there. Some are, but most are not.
I have a total return view of their investments, and that works this way. If I've been able to accumulate through my various plans and accounts, a million dollars, I would tell you that you could take a 5% distribution out of that million dollars on an annualized basis without significant risk to your principal. 4% is a bit safer number, but I think history would suggest that 5% is a very doable number of long-term. So again, back to my example, if you know, you need $5,000, you're going to get $3000 from certain sources. If you've got a million dollars invested, you can generate an additional 5,000 out of that. You've got more income than what you need.
I hope that makes sense. I would look at that as most people are going to be looking at a total return, Take all of those investable assets, and look at a 5% distribution that will give you a pretty good feel for what kind of income you can generate.
The last thing I would say this in terms of retiring is not many people have a potential inheritance in their future. I would say, and we do advise our clients, don't regard that in terms of your planning. Unless you know it's for certain and money's already set aside in a trust for you. Those types of things that's different, but if it's uncertain, I think I'm going to get it, but I'm not sure, I wouldn't wouldn't consider under that in terms of my retirement planning.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Barry McCall and not necessarily those of Raymond James.
Past performance may not be indicative of future results. All investments are subject to risk. There is no assurance that any investment strategy will be successful. While we are familiar with the tax provisions of the issues presented herin, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.