Know Your Numbers
If you want to help free yourself, once and for all, from your dependence on your paycheck, there are four numbers you must know.
We discussed the first number – how dependent you are on your retirement portfolio each year once your paycheck from work ends – in the first article of this series. You have three more to go, so let’s tackle them today!
2: How Long Does Your Retirement Portfolio Have to Last?
The second number you must know is how long your retirement portfolio needs to last.
That may sound like a morbid question, but there’s a big difference between asking your retirement portfolio to last 15 years vs. 30 years, so you must know your number to answer your biggest question, i.e. do we have enough built up to stop working if we choose to?
Most people grossly underestimate how long they’re going to live, so let’s take a look at Average Life Expectancy Tables which provide the average age at which the surviving spouse passes away:
- 60-Year-Old Couple: 30.9 years (age 90.9)
- 70-Year-Old Couple: 21.8 years (age 91.8)
- 80-Year-Old Couple: 13.8 years (age 93.8)
If you are a 60-year-old couple, on average, one of you will live to 91, so that is how long you must plan for. That’s no small task!
What’s Your Retirement Personality?
From Analyzer to Free Spirit, answer 7 quick questions to learn what makes you tick! Give our quiz a spin and learn what kind of retiree you’ll be – and how to plan for a future that fits your unique personality. Let’s go!
3: What Rate of Inflation Will You Assume?
The third number you must know is the rate of inflation you will assume because of the enormous influence it has over your purchasing power. You’ve witnessed this firsthand over the last two years.
Life is expensive, and it keeps getting more expensive!
Even if we only use the average historical rate of inflation of 3% per year, if your ideal lifestyle costs $10,000 per month, or $120,000 per year right now, here’s how much you will need in the future to support that same lifestyle:
- 10 Years: $13,439 per month or $161,268 per year
- 20 years: $18,061 per month or $216,732 per year
- 30 years: $24,273 per month or $291,276 per year
$24,273 per month or $291,276 per year during the final year of your joint life expectancy! The key distinction is that this is not to support a better lifestyle. This is to support the exact same lifestyle you enjoy today.
4: How Much is Inside Your Retirement Portfolio?
The fourth number you must know to determine if you have saved enough and how much you can spend without running out is the amount you’ve accumulated in liquid investments, i.e. your retirement portfolio.
It’s unlikely you will sell your home or cars to support your lifestyle, so let’s not count those right now.
The key distinction is how much of your retirement portfolio is held inside vs. outside of IRAs and 401(k)s.
This is critically important because the funds held inside your IRA, 401(k), or 403(b) (if you happen to work for a non-profit organization) are worth less to you when you withdraw them because they are subject to income tax. So, you must know the bottom-line amount you hold in your retirement portfolio and the percentage of that total held inside vs. outside of IRAs and 401(k)s. With these numbers in hand, you are now significantly ahead of the curve and on the way to finding accurate answers to your three big questions:
- “Do we have enough built up in our retirement portfolio to stop working if we choose to?”
- “How much can we afford to spend without running out?”
- “How do we manage our retirement portfolio to make it last?”
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices or categories. Please also note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your accounts; and, (3) a description of each comparative benchmark/index is available upon request.
Jack Phelps
Managing Partner / Financial Advisor