As you think toward retirement, one of the biggest questions that comes
up is how much money do I need? And one million is a
nice round number. That's a popular answer for people, but the question
is, if it's the right number... So do you need 1 million to
retire comfortably? And what can you expect if you have that much saved?
Also What could you expect if you have less than that,
or if you have more than that saved for retirement? That's what we'll
cover in the next couple of minutes here. And of course,
I can't tell you exactly what you need in a video like this,
but we can look at multiple scenarios and one of these might match
your numbers, so you can get a decent idea of how things might
look. And even if you don't see a match here, I'll have a
link to a handy calculator in the comments below, so that you can
enter your own numbers and get some more customized estimates, it'll either
be this calculator you see here... Or one that basically does the same
thing. So do you need 1 million dollars to retire? The short answer
is no. In fact, most people don't have 1 million. They'll never see
that much or anything close to it by the time they retire.
If we look at some data from the Federal Reserve here,
this is the median retirement savings for people of various age groups that
are in the retirement range, and you can see that most of them
aren't even above about 200,000 of median savings. Of course, the median
is when you line up all the answers from highest to lowest,
the median is the one in the middle, if we look at the
mean, that will be higher because of those with extra assets,
these are wealthy people, they bring up the average and even that is
not even above a half million dollars, however, you might still need 1
million to retire comfortably depending on your situation, obviously having
more money gives you more options, more comfort, and it just makes things
easier. The exact amount you're going to need ultimately depends on things
like your spending level, your health, what type of surprises or luck you
have your geographic area and other factors that impact your spending,
I realize that may be an unsatisfying and it's certainly a non committal
answer, but it's the most honest answer you can have in a video
like this, your situation is unique, so it's really going to depend on
your circumstances, rules of thumb and estimates can help you get a decent
idea of whether things are in the realm of possibility or if you
need to make big changes, so it can certainly be helpful to use
some estimates that we're about to walk through, once you've done that,
then it's a great idea to refine those estimates and get some more
robust planning done. And you can do that yourself, or you can work
with a financial advisor like me to get those answers, but either way,
it's important to get more detailed information before you make a big decision,
so how much retirement income can you get if you have 1 million.
Or more or less? And is that enough for you to retire in
comfort? Let's make some estimates using different assumptions, and in particular,
we're going to change two things, one of those is the withdrawal rate
or how quickly you pull money out of your retirement savings.
The other is the amount of income that you get in retirement,
so this might be your Social Security income, may be a pension,
and then we have to think about, Do you have two incomes in
your household, is it just one income? That's going to affect how high
that income level is... So we might start with a 3%
withdrawal rate saying that you have 1 million dollars in retirement assets
and 30,000 of retirement income. Again, that's maybe a pension and/or social
security, whatever the case may be, and of course, we can't ignore taxes,
we'll get to that in a minute, but let's say you have 1 million
in assets, you're going to use that 3% withdrawal rate, which gets you
30000 of withdrawals in your first year you're typically going to increase
this with inflation over time, so you might think of this as year
one income, and ideally that would increase over time, if you prefer,
you could do a 4% withdrawal rate instead, and that would get you
40000 per year of income. We've talked about the various withdrawal rates
on other videos on this channel, and of course, the higher you go,
the more risk you take, it's more likely that you could possibly run
out of money or that you have to be willing to make some
changes, perhaps taking pay cuts, if the markets don't cooperate throughout
your retirement, then you've got 30000 of Social Security income, so on
this 3% column here, we've got your Social Security 30000
plus the 30000 withdrawal. That might be 60000 of income. If you go
with 4%, 30000 or Social Security, 40000 of withdrawals for a total of
70000, and you can see it in a chart, because who doesn't love
a chart, but if we change that, let's say you only get 18000
of Social Security, as you can see the Social Security will be a
much smaller proportion... Of your total income. So the Social Security
is a nice government guaranteed inflation adjusted source of income,
but it makes up less of your total income, that's important for you
to know as you think about your retirement success, moving that back up
to 30000. Let's talk just a bit about taxes, let's say you are
doing that 3% withdrawal rate, but you don't necessarily get to spend all
of that money or keep all of that money, if you have saved
up 1 million, there's a decent. Chance you will have to pay some
income taxes in retirement, that's because you're probably going to be taking
withdrawals out of pre tax accounts, and that may be taxable or maybe
a portion of your Social Security would also be taxable. So if we
look at an all in tax rate of, let's say, 10%,
that might be your federal plus your state, the total amount you might
have left for spending is 54000 of that 60000,
then of course, you can look at these different tax rates and then
the different amounts that would be left for you to spend,
but let's look at a different asset level, let's say that you have
500000, just half of that saved for retirement. Then again, we go to
this 3% withdrawal rate. You're getting 15000 per year. The social security
income is the same. For a total of 45000 in this case,
as you can see, the Social Security makes up a big portion.
So a lot of your income in this case, is that government guaranteed
inflation adjusted social security payment, so that's again important to
know, and then after taxes, you end up with a bit less depending
on how much you have saved, you might or might not be paying
much in taxes, it just depends on your return and where you live
and a lot of other factors, if your household has more than one
person in it, it could easily be the case that you have 50000,
for example, in social security income, with 500000 in assets. And in that
case, you're getting back up there in terms of what the total income
looks like, it could be 65000, 70000 per year. And we can even
look at, let's say a married couple filing jointly with 250000 in assets,
but a nice social security income, they could even get more than this
possibly, they might be able to have about 57000, 60000,
of course, after taxes, it's less than that, but they might have some
spending money based mostly on that Social Security income, now let's jump
up to some bigger asset levels. And we'll see how those look...
We also need to talk about some of the limitations and complications that
come with doing estimates like this, because this isn't a perfect way to
do it, by the way, I am Justin Pritchard, I help people plan
for retirement and invest for the future, and like I said,
in the description below, you're going to find a link to a calculator
just like this, or it functions the same way, even if it looks
different, I hope you find that helpful, there are also some general retirement
planning resources that I think you'll find really helpful, so be sure to
check all of that out, also a good time for a friendly reminder
that it's just a short video, it can't possibly cover everything.
So you really do need to do more homework and verify,
triple check things with your own financial professional. Attorney and tax
expert with 1.25 million, you can get into six figures of total income
or gross income before taxes, or at least get near that,
of course, if you have less social security income for whatever reason,
that may reduce the total amount you're going to have available,
so again, you just want to play with these two inputs and figure
out what it looks like with your asset level plus your retirement income
sources, then maybe we'll just look at one more and glance at the
2 million figure with 25000 of income. You can see what you have
there. Let's say I've got 50000 of total income, that gets into some
pretty healthy income, now we've looked at some numbers, but these are obviously
an over simplification, so whether or not you'll have enough depends on
your lifestyle and other factors, geographic location, health,
luck and more... You also want to think about things like how inflation
might change spending levesl over time, you need to have some way to
account for that so that you can maintain your purchasing power.
It's also important to think about what changes you will experience such
as reducing your spending as you age, I've got other videos on that
topic, but it's nice to know that people don't necessarily increase their
spending... Right in lock step with inflation throughout retirement, there
might be some varying patterns, whether that's the go go slow go no
go years or something else. You also want to remember potential spending
shocks, so these might be surprises that come up, these might be big
healthcare events that you have to pay out of pocket for,
so we don't necessarily want rely too heavily on numbers out of a
calculator like this... Again, it's a nice back of the napkin estimate,
but it's just a start, and from there, you really do want to
refine things, those taxes or something we glanced at, but that can get
really complicated. So you want to take a closer look at that,
and there may even be some tax strategies or other strategies that you
might pursue that you can't really model in a spreadsheet like this,
as just one example, you might do a Social Security bridge strategy,
that might be... If you retire at age 62, for example,
but you wait until age 70 to claim your Social Security benefit so
that you can maximize that social security income, you would of course be
spending down your assets at a higher rate while you do that,
but it can really help increase the amount of lifetime guaranteed income
you have, then there's the possibility of an early death, we looked at
what it might happen if you have multiple sources of income coming into
the household, but if one of you dies, what happens? One of those
incomes might go away, and plus, the surviving spouse may end up facing
the so called widow's penalty, that's where they get bumped into a single
tax payers bracket, and they may have to pay taxes at higher rates,
ultimately there's a lot of uncertainty whether that comes to how you're
going to spend your money, is it flat and level, or is it
come out in lumps as different surprises and events come up,
or what is the market going to do, how is that going to
affect your retirement? I'm also going to have a video pop up here,
it shows you about taxes in retirement, so that can help you set
some realistic expectations in terms of what you might get and what you
might get to keep and spend, so I hope you found all of
this helpful, if you did, please leave a quick thumbs up...
Thank you and take care.