How to Determine Your Retirement Income Needs

Everyone’s retirement situation is unique. This means the amount of money you’ll need for income in retirement can be a lot more, or a lot less, than that needed by others your age. However, it’s still a good idea to come up with a personal estimate—one that will put you somewhere in the ballpark of where you may need to be.

The first thing you should do is calculate how much you’ll want to spend each month (or each year), including an estimate of any taxes you might have to pay. An easy way to start is by looking at your total current take-home pay, then figuring out what you spend it on. Of course, some things will change after you’re retired: maybe your dry-cleaning bill will go down, but then your travel expenses could go up at the same time. So your expenses may not be exactly the same, but they could be close.

Next, look at any guaranteed income sources you’ll have. This includes pensions, Social Security, and any annuity payments you might get. Guaranteed income can be a real help for people who are nervous about market conditions—or those who just like the peace of mind that comes with knowing the income will be there. Of course, the more guaranteed income you have, the less your portfolio will need to provide for you.

The third step is figuring out the gap between your guaranteed sources of income and your retirement expenses. If you have $70,000 of estimated yearly retirement expenses and $40,000 of guaranteed income, your gap is $30,000. This number represents the amount your savings and investments will need to provide for you each year.

Finally, determine if your “gap number” is one that your portfolio can adequately sustain for 30 or more years. If that number is $30,000 and you expect to have at least $600,000 or $700,000 saved up, that may be workable with the right withdrawal strategy. If you’ve saved up less than that, you may have to make some adjustments. A 4%-5% withdrawal rate, depending on your age, is a good guideline to start with.

Keep in mind that these steps are simplified, and they don’t take into account inflation, investment returns and fees, or future interest rates. But they are a starting point that may give you a glimpse of where you’ll stand once you’ve retired. It’s crucial to have a withdrawal strategy, which is why it’s a really good idea to speak with a financial professional who may help you to fill in the blanks based on your own individual goals and circumstances. Here at Lucia Capital Group, we help people determine their income needs every day. Give us a call—we’re here to help!