The 4 Steps of Retirement Income

Financial topics can be very hard for the average person to understand. Because of this, naturally, we get a lot of questions from people.  One basic, but still very important, question is this: how do I know how much money I’ll need to have for income in retirement?

If your retirement is still 30 years away, it’s pretty hard to come up with a good figure.  Too much could happen between now and then.  Just keep saving as much as you can, and let that long time horizon work for you.  But if you’ve got about 10 years or less, figuring an income estimate is a bit easier.

So the first thing you should do is calculate roughly how much you’ll want to spend each month or each year, including an estimate of any taxes you might have to pay.  One good way to do this is to just look at your total current take-home pay, and, assuming that amount is working for you now, use that as a starting point.  Then figure out what you’re spending it on.  Naturally, some expenditures will go away once you’re retired, but other new expenses will probably take their place.  So they won’t all be exactly the same, but they could be close.

The next thing we do is look at any sources of guaranteed income you’ll have.  We are talking about Social Security, pensions, and any annuity payments you may have.  These guaranteed income sources provide us with a good foundation of what we know will be coming in.  The more guaranteed income you have, of course, the less your portfolio will need to provide for you.  So make sure you know where those guarantees are coming from.

From there, we look at what the gap is between what you’re estimating you’ll need to spend, and how much those sources of guaranteed income will provide to you.  Some people will have enough in Social Security and pensions to cover all of their retirement spending needs.  Others will need help from their portfolios.  So if you’ve estimated $70,000 of yearly retirement expenses and $40,000 of guaranteed income, your gap is $30,000.  That’s your “gap number” –  how much your savings and investments will need to provide for you every year.

Finally, take that gap number and determine if your portfolio can adequately sustain that amount for at least 30 years.  If you need 30 grand and you expect to have at least $600,000 or so saved up, that may be workable.  If you’ll have less than that, some adjustments may be needed.  Depending on your age and longevity, a 4%-5% withdrawal rate is a good guideline to start.

Remember, these steps are simplified, and we are not taking into account investment returns and fees, future interest rates, or inflation.  Those will factor in as well.  But these steps are a starting point that may give you an idea of what you’ll need from an income standpoint once you’ve retired.  We do this every day at Lucia Capital Group, so if you need help in figuring it all out, just give us a call!

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

All investments are subject to risk including the loss of principal. No client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

Annuities are long-term investment products designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuer subject to their terms and conditions. Early withdrawals may be subject to surrender penalties and, if taken prior to age 59½, may be subject to an additional 10% federal tax. Annuities are not FDIC insured. Certain terms and conditions apply, so please read insurance company materials carefully. Insurance products offered through Lucia Securities, LLC (CA Insurance Lic. #0H40817).

Examples discussed are hypothetical, are for illustrative purposes only, are not guaranteed and subject to potential federal and state law amendments. There is no guarantee that you will achieve the results discussed or illustrated.

Rick Plum is a registered representative of, and offer securities through, Lucia Securities, LLC (“LSL”), a registered broker/dealer, member FINRA/SIPC. Advisory services offered through Lucia Capital Group (“LCG”), a registered investment advisor, and an affiliate of LSL. Registration with the SEC does not imply a certain level of skill or training.

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