Ready For Retirement
Ready For Retirement
How Much Do I Need to Retire? (3 Simple Steps to Determine the Right Amount)
Wondering if you can retire at 60 with $2 million? In this episode, I walk you through a simple, 3-step process to figure out exactly how much you need in your portfolio to retire comfortably—and confidently. Whether you've already run the numbers or you're just starting to think about retirement, this is a great way to gut-check your plan.
We'll talk about how to calculate your real retirement expenses (hint: it’s probably not your current salary), factor in income like Social Security or a pension, and then figure out what size portfolio you actually need to fill the gap. I’ll also cover some key nuances that can make or break your plan—like uneven income, taxes, and what happens if one spouse passes away.
If you’re looking to make smart decisions about retirement, this episode is for you.
Questions answered:
1. How do I figure out how much I really need to retire, based on my actual expenses—not just my current income?
2. How can I tell if my $2 million retirement portfolio will be enough to support my lifestyle at age 60?
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Timestamps:
0:00 - Determine retirement expenses
3:54 - Retirement taxes will be lower
5:12 - 2 ways to determine expenses
7:17 - Determine nonportfolio income sources
8:38 - Determine portfolio withdrawal rate
11:06 - Consider uneven income sources and expenses
12:54 - Consider taxes in retirement
14:00 - When a spouse dies
15:22 - Wrap-up
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Today, I'm going to show you the three very simple steps that you can take to know exactly how much you need in your portfolio to retire. Now, even if you've gone through a very comprehensive process to determine that number for yourself, this is still a great process to go through just to gut check what you've done and make sure that you're looking at things from all angles. So I'm going to walk you through these three very simple steps and then, at the end, I'm also going to walk you through some nuances to this that could change things a bit. So stay tuned for both the core process to go through, as well as some of the things that could potentially change this or derail this if you're not careful. This is another episode of Ready for Retirement. I'm your host, james Canole, and I'm here to teach you how to get the most out of life with your money. And now on to the episode.
Speaker 1:The first thing that you need to do when determining how much money do you need in your portfolio to retire is you need to determine your retirement expenses. Now, before we talk about what your retirement expenses are, let's first talk about what they are not. A lot of people fall into the trap of thinking what I'm earning today, that is the expenses that I'm going to have in retirement. Let me walk you through an example to show you why that's not the case. What you're earning today, you have a lot of deductions, you have a lot of taxes. You maybe have a lot of expenses that aren't actually going to be there when you retire. Let's use an example. Let's assume that you are earning $100,000 today and you're trying to figure out how much money do you need in your portfolio to retire. Well, start with that $100,000, but don't use that as your retirement expenses, even if you want your lifestyle to stay the same. There are some things that are going to change. For example, on that $100,000, you are paying payroll taxes. Payroll taxes are also called FICA taxes. This is what's used to fund Social Security and Medicare, and that is 7.65% of every dollar that you earn up to a certain cap. That is going to pay that tax. So, on $100,000 of income, that's $7,650 of expenses that will no longer be there for you when you're retired. So that's something that we can back out. Let's also assume that maybe you're saving to a 401k and that's how you're preparing to retire. Maybe you're saving 10% per year of your annual salary to that 401k. Well, when you retire, you're no longer saving to your 401k. So 10% of $100,000, that's another $10,000 that will no longer be there when you're not working anymore. Next, what if you have a mortgage? Maybe you're paying money to a mortgage payment and that payment is going to be gone by the time that you retire. So you're not necessarily taking a pay cut, but your expenses go down because there's no longer a mortgage to pay off in your retirement years, like there is today.
Speaker 1:Also, taxes as a whole For most people. They are paying taxes in a lower tax bracket in retirement than they are in their working years. So let's quickly tie all this together so that you can see how your actual retirement expenses might be very different than your expenses in your working years. So you can start to see how this is going to be different for you. So if we start with $100,000, as we did in this example, back out $10,000 for 401k contributions. You no longer need to do that when you're retired. Now you're down to only needing $90,000. Next, let's back out the payroll taxes. Again, that's $7,650 on $100,000 of salary. Now we're down to $82,350.
Speaker 1:Now let's make some assumptions about taxes. Let's assume that this individual is filing taxes single and they are using their standard deduction, which for 2025 is $15,000. They would end up paying about $11,400 in federal taxes, before we include state taxes. But I'm going to leave that out because that's going to be different depending on what state you're in. And again, what we're trying to do here is we're trying to say for this individual that's earning $100,000 in their working years, what are they actually spending after taxes are taken out, after 401k contributions are taken out, after mortgage is taken out, so we can see what number needs to be replaced in their retirement years? So if we back out that roughly $11,400 in assumed federal income taxes for this individual, now they're closer to about $71,000 of expenses that they have.
Speaker 1:Next, let's assume that their mortgage is paid off and let's assume that they're paying $1,500 per month in principal and interest payments. Property taxes remain, homeowner's insurance remains, but let's assume that that $1,500 payment was going towards principal and interest. Well, if you remove that amount $18,000 per year or $1,500 per month from $71,000, what you actually end up with is $53,000. So what have we done there? Just to tie it all together? What we've done is we said for this individual who's trying to figure out how much money do I need in my portfolio to be able to retire. We are starting by asking them how much do you have in expenses and their expenses are not their income, which is a hundred thousand today it's what do they need to replace when they're actually retired, which what we've done is we've narrowed that $100,000 down to $53,000.
Speaker 1:Now, of course, just because you're retired doesn't necessarily mean you're not going to pay anything in taxes. For the most part, there's probably going to be some taxes. But just to use an example here, if this individual who now needs to replace $53,000 of income, if they have $28,000 per year from Social Security, so a little bit more than $2,000 per month if they take $10,000 from their traditional IRA and $15,000 from their Roth IRA, that is a total of $53,000 and they would be in a 0% federal income tax bracket. That's due to what's called provisional income with Social Security to determine how much of that is taxable. Plus, obviously, the Roth IRA is not taxed. And then they have the IRA distributions, but that would fall under the standard distribution amount or the standard deduction amount. So that's just a very basic example to illustrate the fact that once you have that $53,000, or once we have your expenses, your actual taxes in retirement are probably going to be far less in many cases than they were in your working years. So that step one is really determine how much are your expenses going to be in retirement.
Speaker 1:There's two ways to do this. There's what I'll call a top-down approach and that's what we just did. Start with a top-level number that you have today. What is your income today? Just your gross salary before any deductions, taxes, etc. Then, from there, start pairing off the things that will go away in retirement. Is that payroll taxes? Is that a lessening of your federal tax bill, of your state tax bill? What about mortgage payments? What about retirement savings? What about other expenses that you have today that will no longer be there? Then, of course, you want to add back things in that will be there. Are you going to take more trips? Are you going to do more things that cost money that you're not doing today? So it's simply starting with your top level number today, removing what's going to go away and adding back in what's going to be there in retirement that isn't necessarily there today. That's a top-down approach. It's going to be very simple. You can probably do that in just a matter of a few minutes and it's, for the most part, going to be approximately correct.
Speaker 1:A more detailed way, but a much more intensive and involved way, is the bottom up approach. The bottom up approach says what is every single thing that you're going to spend money on Groceries, utilities, your gas bill, your travel, all these things? Add them up line by line to see not every single transaction but every single category. What do you estimate you're going to spend? And you total those numbers up to get to the number that you think you're going to spend in retirement. I recommend both. I recommend both. I recommend both because I see people doing the bottom-up approach and what tends to happen is they miss a lot of things. They say, okay, yeah, I'm going to retire, I might spend $4,000 per month in retirement, because they add up what they can think of off the top of their head. But then I say what is your income today? And I might be taking home $15,000 a month in income today. And I'll say well, that $15,000 per month of income today, how did you get to that $4,000? And obviously there's a humongous gap between those two numbers and it makes them think, ok, yeah, when I did the bottom-up approach, I was just thinking of what I could remember top of mind. So the top-down approach also helps you to come at this from different angles. But the bottom line is step number one to determine how much do you need in your retirement portfolio to retire is determine what expenses will you have. Step number two is to determine what will your non-portfolio income sources be in retirement. So once you know how much you want to spend, what you have to realize is that the role your portfolio is going to play is your portfolio is going to create the income to help you spend that amount, but not usually the entire amount, because you'll usually have the help of things like social security or pension or things of that nature that are covering a portion of your retirement expenses.
Speaker 1:Let's use a really simple example. Let's assume that you want to spend $60,000 per year in retirement. Let's also assume that you have $25,000 per year coming in from Social Security. What does that mean? It means that gap, that gap of $35,000, that's what we really want to hone in on. So, as you're looking at your plan, start with your expenses, which was step one. That's the most involved of all these steps. It's probably the most time consuming of all these steps. It's just to get that number right and it's the most important of all these steps. Then back out any income sources. You will have Pension, annuities, social security, things that are going to be coming into your bank account automatically without requiring you to draw down your savings or your investment portfolio. Add those things up and find the difference. In this example, 60,000 of expenses minus $25,000 of non-portfolio income sources, in this case social security the gap is $35,000. Now we can go to step three. Step three says apply a withdrawal rate to that number to determine what does the big picture portfolio need to look like to create that level of income, not just year one of retirement or year two of retirement, but every single year throughout retirement.
Speaker 1:A common rule of thumb is called the 4% rule. Now, I think there are other ways to do this, maybe even better ways to do this in many cases, but the 4% rule is a very widely known, well-known rule that says if you have a portfolio and if it's invested the right way, you can be reasonably assured that that portfolio is going to last for at least 30 years if you just take 4% per year from that portfolio. So let's look at that. What that's telling us is $35,000 per year. In the example that we're using, that needs to represent 4% of the bigger portfolio value. So we're going to take 35,000, we're going to divide it by 4% and that's going to give us $875,000. In other words, if this individual had $875,000, they could take a 4% withdrawal rate, which would be $35,000. They could use that $35,000, add it to their social security of $25,000 and get the full $60,000 per year that they want to live on. The nice thing about the 4% rule is it's assuming you're going to increase your withdrawal for inflation over time, so it's not saying you can only take out $35,000 and never increase it. It's assuming cost of living adjustments to keep up with inflation over the duration of your retirement.
Speaker 1:Now, the 4% rule is not a hard and fast rule. Generally speaking, I'll see a lot of people use somewhere between 4% and 5.5% as the withdrawal rate they're going to use. If you were using the 5.5% as the withdrawal rate they're going to use, if you were using the 5.5% withdrawal rate and, by the way, you can't just use something and assume that it's going to work you need to be invested the right way. You need to know what rules to follow. You need to understand how this fits in the proper context of what type of market environment can this support and when might you need to make adjustments. But if you were to use a withdrawal rate of 5.5% instead, now all of a sudden the portfolio needed is down to $700,000. So you can see how the withdrawal rate that you use. You can't just pull it out of thin air. You can't just say I want a 50% withdrawal rate. That's not going to be sustainable, that's not going to last for the rest of your retirement. But do some research, understand what withdrawal rate is best for you and the way your portfolio is invested and how long you need it to last for, so that you can apply that to your withdrawal need and get a portfolio value. So those are the three steps, fairly simple.
Speaker 1:What are your retirement expenses? How much of those expenses will be covered by non-portfolio income and how big of a portfolio do you need to fill in the difference? Now, I mentioned there's some nuances. I mentioned there's some details here. Yes, this is very simple and this is going to get you most of the way there. But keep in mind there are some things that will change this, and I want to go through a quick list of what that will be.
Speaker 1:First is consider uneven income sources. This all makes sense if you're assuming that Social Security starts right when you retire. What about that individual that retires at 60 and maybe doesn't collect Social Security until age 70? Well, that's a 10-year gap where your portfolio is going to need to do a lot more heavy lifting up front and then maybe less heavy lifting on the backside from 70 and beyond, where more income is coming in from Social Security, which lessens the pressure on your portfolio. So be mindful of that. How do you adjust your withdrawal rates? You're not just going to take a standard 4% every single year and have a giant pay bump at age 70, because that's when Social security comes in. You're probably going to take more potentially in the first few years and a lot less in the last few years. So how do you balance that out? So that's accounting for uneven income sources.
Speaker 1:On the flip side, what if, instead of uneven income sources, you have uneven expenses? What's an example of that? Well, maybe you don't have your mortgage paid off when you first retire. So maybe the first five years, the first six years, first seven years you still have a mortgage payment, so you have higher expenses in the first few years and then they'll start to taper off later in retirement. Or what if you want to travel a whole bunch in retirement, but not forever, maybe just the first 10 years? The first 12 years Maybe you have a bigger travel budget up front, but that lessens as you grow older. What if you have much higher healthcare expenses later on in retirement than you do at the beginning? So these are different things where, yes, the simple framework that I talked about is a great place to start. You have to account for the fact that typically, your expenses aren't the exact same, adjusted for inflation, throughout retirement. You might spend more up front, maybe even more in the back end for healthcare expenses. How do you account for some of those uneven expenses?
Speaker 1:Another nuance here, of course, is tax considerations. So I talked about the importance of understanding how much is coming in from non-portfolio income sources. Well, $30,000 of income from a pension is a whole lot different than $30,000 of income coming in from Social Security, not because of the dollar amount, but because of the way that's taxed. Social security in many states is not taxed, and at the federal level, a maximum of 85% of it is taxable, whereas a pension typically 100% of that is going to be taxed, both at the state level depending on what state you're in and at the federal level. So the dollar amount is not what we're looking at as much as what's that after-tax amount of that income, because it's not what you're bringing in, it's what you're keeping. That's ultimately going to help you understand how much do you need to meet your income needs in retirement. Along those same lines, if you're figuring out how much you need to pull from your portfolio, $40,000 being pulled from a traditional IRA is a whole lot different than $40,000 being pulled from a Roth IRA. One is completely taxable, one's completely tax-free. So understanding the difference between those is important when determining how much you actually need to pull out in retirement to meet your needs.
Speaker 1:And then this is a big one. What is the impact if you're married? When one spouse passes away before the other, there is an extremely high likelihood that you're not going to pass away at the exact same time. So let me use an example. What if you're married and both of you have a social security benefit of $3,000 per month and you want to live on $7,000 per month. What that means is you have $6,000 of non-portfolio income, your $3,000 of social security and your spouse's $3,000 of social security. That means you only need to pull $1,000 per month from your savings or your investments.
Speaker 1:What happens when one spouse passes away? Well, your Social Security payment gets cut in half. That $6,000 of income gets cut down to $3,000. You still need to pay. You still have expenses of $7,000 per month. Maybe that goes down a little bit after one spouse passes away, but it's not going to be cut in half. And what you see is, all of a sudden, the difference between what's coming in non-portfolio income sources and your actual expenses. It goes from $1,000 per month to $4,000 per month. It goes up four times, which theoretically means the portfolio value you would need to support each of those withdrawal rates increases by 400% as well.
Speaker 1:So how can you account for this on the front end? How can you account for the fact that, yes, we want to be able to support our needs, but understand or be prepared for the impact of one spouse pre-deceasing the other? To say, what would you do in that instance to replace the lost income? So, as I hope you can see here, retirement planning doesn't need to be incredibly complicated at the outset. You should be able to get a good sense of how much you need in your portfolio to retire based upon just a few key pieces of information what are your retirement expenses, how much will you have in non-portfolio income sources and what size does your portfolio need to be to fill in the difference? Understanding that is going to get you most of the way there, because once you have this plan in place both the core plan to understand some of these details, as well as an understanding of some of the nuances, some of the contingencies that might exist you can go into retirement with a lot of confidence, knowing that you have a plan in place to support what you want to do.
Speaker 1:Root Financial has not provided any compensation for and has not influenced the content of any testimonials and endorsements shown. Any testimonials and endorsements shown have been invited, have been shared with each individual's permission and are not necessarily representative of the experience of other clients. To our knowledge, no other conflicts of interest exist regarding these testimonials and endorsements. Hey everyone, it's me again for the disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner.
Speaker 1:Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartnerscom and click start here, where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions. We'll see you next time.
