If you’re uncertain about your retirement readiness, the first step is to determine the amount you’ll need in your portfolio to retire. Understanding how much you’ll need prevents all kinds of mistakes such as over-saving (working longer than needed) or under-saving (risking a higher probability of running out of money during retirement).
Everyone’s number will be different. Some will need $200,000 in their portfolio while others will need $5,000,000 (or more). Your number will be based on how much you’ll need from your portfolio over the course of your retirement. Breaking it down by year is the easiest approach I’ve found. If you’re having a hard time projecting your retirement spending, sometimes it’s helpful to start with your current spending, then make adjustments from there, such as: Will the kids be out of the house? Will the mortgage be gone? Will you be doing extra things that cost money?
Beware that a common misstep is forgetting to add healthcare costs to your retirement budget. Many people have employer subsidized healthcare, but once you retire, you’ll be on your own unless you have retiree healthcare benefits. It is best to discuss projected healthcare costs and insurance premiums with somebody that specializes specifically in health insurance, not just a general insurance person.
Another common oversight is forgetting to add a buffer for extra expenses. During retirement, you’ll still need to maintain your house and will experience large one-off expenses (windows, roof, furniture, appliances, car, etc). Some years you may not have many of these types of expenses, and others you may have a lot. You may account for these things by adding an annual buffer to your retirement budget. For example, maybe you budget an extra $5,000-$10,000 per year in extra one- off expenses. This is only an example and you should base your buffer on your own personal situation.
Now that you have your estimated annual retirement expenses, next we add up all the sources of income you expect in retirement such as social security,
pension, rental income, etc. These amounts can be subtracted from your projected retirement expenses, and the amount left over will need to come from your portfolio.
Once you have an approximate idea of the amount you’ll need from your portfolio each year during retirement and it’s expected duration, you can now find your number. However, this calculation isn’t straightforward because your investment choices, influenced by your risk tolerance, have a tremendous impact on your savings goal. For instance, an individual with a very low risk tolerance might prefer to keep their retirement portfolio in cash to avoid the possibility of investment loss. Since cash doesn’t even keep up with the cost of living, they will need a relatively higher savings target in order to sustain them if we assume a 30-year retirement period. On the other hand, investments with growth potential, though less predictable, can help portfolios outpace inflation and potentially reduce the required savings target compared to more conservative approaches. Determining the right investment mix based on your goals and risk tolerance is a challenging decision-making process that I specialize in assisting individuals with.
If you’re wondering about your retirement readiness, please reach out to me. We will figure out your number and develop a savings and investment strategy based on your goals. Alternatively, if needed, we may adjust your goals to fit within your financial means and create a plan based on that. Whatever it takes, together we’ll find a strategy that makes sense for you.
Comentários