There is no “one size fits all” approach, but knowing the right questions to ask yourself is key.

When you are 20 or 30 years away from retirement, it may be possible to use the 4% withdrawal rate as a rule-of-thumb for simple projections. As you get closer to your retirement date, you will need to become more precise with planning based on your specific resources and needs.

So, how much do YOU need to retire? The only right answer is, “it depends.” Here are a few questions you will need to think through to find out what makes sense for your situation.

  • What are your projected expenses? You will have fixed expenses such as housing, food, healthcare and clothing. Then, you will have variable expenses like travel, entertainment and gifting. It’s important to have a good understanding of the income you will need to cover your expenses.
  • What sources of income do you expect in retirement? Social Security… what age will you claim benefits? Pensions… should you take a lump sum or lifetime income? Real Estate? These potential sources of income will help reduce the amount of heavy lifting required by your investments.
  • What age would you like to retire and how long do you expect to live? Will you have a 10 year or 40 year retirement? How long you need your assets to last will have a massive impact on your approach to spending those assets. In general, the earlier you retire, the more conservative you will need be with your withdrawal rate on your investments. Some guidelines for safe withdrawal rates based on retirement age are:
    • Age 45 = 3%
    • Age 55 = 3.5%
    • Age 65 = 4%

Now for the Math!

When you put that all together, the simple formula is Retirement Expenses – Retirement Income = Retirement Need. The Retirement Need will be the amount of money you will need to draw from your portfolio every year. Since this is The Money Guy Show, we are not afraid of a little math, so get out your calculator! Divide you annual Retirement Need by your expected withdrawal rate and the result is your “number.” Let’s say you expect to need $50k per year and plan on retiring at age 65, you would divide 50,000 by 4% (50,000/.04 = $1,250,000.) In this example, your portfolio would need to be worth $1.25M to support a 4% withdrawal rate.

Of course, this is a simple way to come up with a ballpark number. A great financial planner will run projections that incorporate taxes, inflation, monte carlo distributions and other variables that will provide a much more detailed view.

Check out this clip where Brian and Bo have a deeper discussion about getting ready for retirement.


Video: How to Ensure You Are Ready For Retirement!


Video: At What Age Should You Calculate Your Retirement Number?