We have a lot of conversations that start with the question, “How much money do I need to retire?” The answer is a lot more than you might think, especially if you’re used to scraping out an existence on a six-figure income.
A Million Dollars Ain’t What It Used To Be
To cut right to the chase, a million bucks is not enough. By the way, if you haven’t already done so, check out our post on how to create your own pension before you read on.
Some may think the methodology we suggest in said post is insufficiently glamorous. While it’s certainly not what most “financial advisors” would suggest, it’s a lot more glamorous than incontinence, which is an issue you’ll be dealing with all on your own if you run out of money during retirement. Plus, if you’ve been picking up what we’ve been putting down long enough, you’ll know that challenging the norm is what we do best.
So, now that you’ve heard us wax poetic about a boring-but-reliable mix of financial products to generate your retirement income – i.e., cash value life insurance and SPIAs – we can get back to the original point…If a million bucks won’t cut it, how much will you need to retire?
To be as straight with you as we can possibly be, it depends. Why? Because it does.
We’re Emotional Creatures
Something that Brandon and I have discussed in planning with clients and amongst ourselves is the difficulty most of us have in flipping the switch from savings/investing to retirement income.
When you retire, you are entering a phase of life that is completely different from what you are accustomed to. There is a significant mental shift that has to take place, and for most of us, it’s an emotional one.
Now, we normally don’t dive off into the deep and murky waters of emotional finance. But, to ignore it in this instance would be malpractice. It’s real, and we have to address it.
Our whole lives, we work diligently to save a portion of our hard-earned income to accumulate enough assets so that one day, we can live comfortably on the passive income generated by those assets.
Throughout most of our lives, we see account statements that move upward every year (if you employ our recommended methodology), and we work very hard to save a great portion of the income earned during this period.
At retirement, we’re suddenly in a situation where we may be forced to watch our balances dwindle every year. Do not discount the emotional toll this plays on you; it’s tough even if you know it’s going to happen and have planned for it.
Now, there are situations where “spending down” your assets is not a necessity, but in many cases we see, it is the only viable alternative if a person has a moderately high income target in retirement.
What does that mean exactly?
It means that you may have to give up control of a portion of your assets to use a SPIA or other type of income-generating annuity to hit the income number you need. You may be able to use a SPIA to generate income in the short term while letting the lion’s share of your assets grow another 10-15 years before tapping into them for retirement income.
Keep in mind that at this stage of your life, you should really take market risk off the table. This means you have to plan accordingly in the years leading up to your retirement date.
How, you ask? We’re keeping it simple today…you need a big pile o’ money. That’s a technical term, by the way.
Seriously, you need more than you think, and once you’ve removed market risk from your equation (as you should), your biggest risk is longevity. Your risk has shifted from not living long enough to living way too long. Sure, you could always die sooner, but if you plan accordingly, there are more fun solutions.
If you’d like a personalized answer to the question of how much you need to retire or seek help in planning for that blessed day—whether it is quickly approaching, has already arrived, or is still in the distant future—we can help.