How Much Income Will You Need in Retirement?
How to Think About Income in Retirement
We meet with several dozen prospective clients each year. These people have achieved professional success and accumulated sufficient wealth to be considered “affluent” or “wealthy.” And the vast majority, year after year, don’t know how much they spend annually nor how much income they might need in retirement. Fortunately, that’s what we do!
The people that we meet aren't outliers. According to this 2020 survey 65% of Americans have no idea how much they spend each month. Financially successful people intuitively pay themselves first (usually by maxing their retirement savings). They are often either so busy making money or so good at it, that they don’t focus much attention on the minutia of tracking spending. They know they don’t spend all they make, but the details and exact figures are usually a little fuzzy. Let’s face it, who wants to spend two hours on a beautiful spring Saturday grinding over an Excel spreadsheet, credit card bills and bank statements?
Accumulating Wealth is Different from Drawing It Down
It’s not enough to simply accumulate wealth, we must plan for retirement and the end of a regular paycheck that comes with it. Here’s a brief look at why the questions we pose in this blog are so important and how we help answer them.
A tax return provides information on how much income someone has (and its sources), but it tells us very little about spending. The tax return and a pay stub allow us to compute a “net available to spend” – which is a first step in reconciling spending. We employ a “3F framework” (Fixed Bucket / Flexible Bucket / Future Bucket) that helps clients get a good estimate of their spending. Our focus isn’t about reconciling to the penny - we emphasize progress, not perfection.
Knowing what someone spends helps us determine (a) how much annual savings exists or can occur between now and retirement and (b) provides some insight into what spending might be in the future. There are certain rules of thumb about retirement spending levels, but like many such shortcuts, they may or may not be applicable to your situation.
Knowing the composition of your expenses helps us get under the hood and fine tune projections about spending in retirement. This helps bring valuable context to issues for discussion like:
- Can you retire sooner than you’d planned?
- Can you wait longer before claiming Social Security?
- Which assets / accounts should I use first in retirement?
- What happens if the stock market drops 15% - 30% shortly after I retire?
The benefit of understanding one’s spending is that it brings more clarity to an unknowable future. Give us a call if we can help bring 20/20 vision to your financial future!