As financial advisors, we are repeatedly asked “how much do I need to retire?” There is more than one way to answer this question, and the answer can vary greatly from person to person. Fear not, because there are best practices and trusted frameworks that can get us to a good answer for anyone. In recent decades, popular media has framed this scenario around accumulating a certain amount of assets – such as $1 million or $2 million dollars in invested accounts. But as time carried on, professionals began to reframe the conversation to plan for an amount of income needed to cover your needs.
The retirement planning analysis started to shift from “what kind of retirement lifestyle will my savings allow me to have,” to “how much income do I need to maintain my desired lifestyle in retirement.” In reality, both approaches have merit. This shift may sound subtle, so read on as we explore the differences and how they fit together.
At HighPoint Advisors, LLC, located in Syracuse, NY, we help equip our clients with the tools and knowledge to make confident, informed financial decisions. Our dedicated team offers personalized support tailored to your unique goals, with services including estate planning, long-term care planning, life insurance, and more. At every stage of life, HighPoint Advisors, LLC is here to guide you and your loved ones with experience, integrity, and care.
Asset-Based Planning
When focusing on accumulating a certain amount of assets, you typically will set a target amount that should sustain you throughout retirement. Some people pick a number that looks or sounds good, such as a nice round $1 million bucks! Some people will reverse engineer an amount based on how much they plan to withdrawal each year, such as 4% annually. The widely used “4% rule” generally states that a diversified moderate portfolio should allow for you to take out 4% each year and not run out of money. In this example, your $1 million portfolio should allow for $40,000 in withdraws annually. Common types of financial assets include IRA’s & retirement accounts, brokerage accounts, annuities, CDs, bank accounts, and alternative investments.
Pros of this approach
- Advantages of this approach include the ability to control your options for how to use the money in your accounts, as well as being able to easily track your savings progress towards “your number.” Also, you would be able to pass on remaining assets to beneficiaries if you don’t end up spending all your money.
Cons of this approach
- The downside aspects of this approach include the fact that we can never know how markets will perform in the future, nor do we know how long our retirement years will last. That makes it hard to plan for your money to be there forever to cover your living expenses.
Income-Based Planning
This method centers on generating ample and reliable cash flows to cover both essential and discretionary expenses, using predictable income sources. With a focus on matching spending needs to income sources, this approach will help reduce the risk of running out of money in retirement. Both fixed guaranteed income sources as well as variable non-guaranteed sources should be considered. Common income sources include Social Security benefits, pensions, annuities, various forms of investment income, rental property income, and sometimes even part-time work if a retiree wants to stay active or supplement other forms of income and savings.
Pros of this approach
- The focus on directly covering known expenses will add a degree of comfort and certainty to your plan. Some income sources, like a company pension or Social Security, add stability because they are guaranteed and will not change with financial market volatility. This all works to provide retirees with confidence and a clearer path forward during retirement.
Cons of this approach
- The main drawback of this approach is that it does not usually fully account for the impact of inflation over time. Focusing less on asset growth will leave a retiree susceptible to increased costs such as health care or other unexpected expenses. This method of planning is complicated, as it required care in balancing guaranteed income sources with growth assets.
How Much Do I Need to Retire Nowadays?
Because of geographical and lifestyle differences, there is no universal answer to this question. Sorry, but everyone is different! One popular guideline that many professionals suggest is to aim for an income amount equal to 70-80% of your pre-retirement income. In retirement, you won’t have some of the expenses you had while still working. Others may suggest accumulating assets equal to a multiple of your annual budget, perhaps 25 times your expected yearly spending. Your specific plan should be based on your specific lifestyle, health, and goals.
You’ll need to know your essential expenses, and how they will be covered. This involves things like food, housing, and health care. You’ll need to know your non-essential expenses, and whether (and how much) you can also cover those costs. These discretionary items may include travel, entertainment, and hobbies. And, of course you’ll need to take inventory of the resources you have to cover all the needs of your budget. These include your fixed guaranteed income sources as well as your savings and investments.
There are various factors that impact what the right amount of assets or income in retirement will be. Calculating your current level of financial resources is a great starting point, but you also should consider your debts, liabilities, and cost of living. Your retirement goals will be directly affected by your financial health. For example, it may be hard to travel in retirement if you still have to spend income paying down debts.
Which Approach Is Best?
In reality, the ideal course of action blends both disciplines. Asset-based strategies allow for growth and flexibility, provide reserves and liquidity for major unexpected expenses, and protect against risks such as inflation. Income-based approaches can provide stability, ensuring the foundation of your budget is covered regardless of market swings.
A prudent strategy is to attempt to have your essential expenses covered by guaranteed income sources such as Social Security benefits, pensions, and annuities, and then utilize invested assets and savings for discretionary spending, emergencies, and legacy goals. Harvesting investment income from your assets can serve to fill the gaps in your budget not covered by available fixed income sources. Blending these two approaches in a way that makes sense for your individual financial situation can be the key to many long and satisfying years in retirement.
Make Your Plan Today
One-size-fits-all is not how retirement planning should be described. Whether you think in terms of dollar amounts to save or the monthly income you’ll need, both approaches ultimately focus on the same goals of financial independence and less day-to-day tension. Working with a financial advisor to inventory income sources and assets can help you build a personalized plan. Your plan should balance assets and income, be adaptable to changing circumstances, and provide for the lifestyle you imagine for your many retirement years. Regular monitoring and adjustments for market changes and personal circumstances will help your plan stay on the path to ongoing financial wellness in retirement.
At HighPoint Advisors, LLC, our advisors are experienced in evaluating assets and income sources to create the right retirement mix for the individuals and families we serve. We are well versed in various withdrawal methodologies and investment management strategies, and understand how various government and corporate fixed income sources work together to form a solid retirement plan.
Contact us today to get started on your plan!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.