What does it look like to retire with 50,000 a year of income?
Well, that's exactly what we're going to look at here. We'll go through
some specific examples and I will leave some resources in the description
that you can use to calculate your own numbers to figure out exactly
how much you might need and what it might look like,
I'm Justin Pritchard and I help people plan for retirement. So let's start
with a basic example of a single person, and if you are in
a coupled household, then you can update these numbers for your needs.
The median annual income for a household that's made up of over 65
year olds is just under 50000 a year. So if you're wondering if
it's possible to retire on that, the answer is that a lot of
people do it, in fact, the median is the one that's in the
middle when you line up all of the responses from biggest to smallest,
and so roughly half of all households are living on less,
of course, in those coastal cities or higher cost areas, the money doesn't
go as far, but I can tell you that there are people in
those areas who live on that much... In fact, I have clients who
live in metropolitan areas who are living on less than 50000 a year.
That data by the way, comes from the Census Bureau. So how much
money will you need to generate that type of income? Your retirement income
is a combination of any income you get from pensions and Social Security
and any other sources, plus any withdrawals you take from your retirement
savings, so that might be IRAS, 401Ks, TSP, etcetera. Your Social Security
or other fixed income sources make a base of income, and then whatever
you need on top of that is the gap you need to fill
from your withdrawals. The average Social Security benefit is $18,000 a
year, around 1500 per month. But of course, the amount you get depends
on several factors, like your earnings history and how old you are when
you claim benefits and other factors, the Social Security Administration
has a handy quick calculator and lots of other tools that can help
you estimate what your benefit might look like... So if we say that
you're 61 years old today and your current earnings are 50,000,
it'll tell us that at your full retirement age, you might get about
1600 per month, that's just above average, but if we update that to
show a worker who's earning 85,000 in the current year, and they're,
again, not necessarily going to take benefits right away, that benefit for
full retirement age gets to be quite a bit bigger, and if you
want to play with these numbers, again, you can find this information in
the description below, and then you can even customize things. So they're
making certain assumptions about how much your income grew over time,
but you can update that and you can say, You know what,
in this year I didn't work for a couple of years,
and then in that year, I had a really good year of earnings.
Ultimately you can make this customized, closer to your reality, let's assume
you're going to get this 23000 or so, and we multiply that by
12 months, so your total income for the year is around 28000,
if that's the case, the amount you're going to need to withdraw up
per year is around 22000. So how much do you need saved up
in retirement savings and investments? This is a calculator you can get
to from the description, and it's going to show our 50000 of desired
income in retirement, we've got the Social Security benefit, so the amount
we need to get out of income from withdrawals is shown here,
around 22000. Now, we need to make some assumptions. You're always predicting
the future when it comes to retirement, and you can't do that perfectly,
but what you can do is make some educated guesses, and what we're
going to do is try and figure out what's an inflation adjusted way
to get 50000 per year. So that's in today's dollars, and we're going
to inflate that if retirement is in the future, and once you start
taking withdrawals, we're going to inflate the amount that you take each
year so that you continue to keep your purchasing power over time.
So we said You're 61 and you need to go until 67,
so we're going to say there are six years until retirement and just
leave the rest of these assumptions, why don't we make a 30 year
retirement because you might be in good health and we can come up
with a lump sum that you would eventually need in retirement,
in this case, that's about $610000 611000, then you can figure out based
on what you might already have saved up for retirement, how much do
you need to save each year so that you can hopefully reach that
goal? Again, none of this guarantees that everything will work perfectly,
but this is a way to what your numbers might look like,
it might also be smart to triple check those numbers with a financial
professional or with other sources, and you can even run that by with a
rule of thumb. So if you're familiar with the 4%
rule, which is a bad name for it, because it's not a rule
it's a research finding and nobody actually follows it perfectly, but we
can say based on that, is it reasonable to expect that you could
take withdrawals over 30 years? Back to our handy calculator, you're going
to be withdrawing around 22000 per year, we're going to divide that by
the amount you want to have saved up at the beginning of retirement
around 611000, and we get a 3.6% withdrawal rate. That's below the 4%,
so that's looking better than it being above 4%,
then you need to decide if 3.6% is too high or too low
or about reasonable, again, none of this guarantees that you won't run out
of money or that everything will work perfectly. But what we can do
is improve your chances of success. A couple of things that can come
up are, for example, healthcare spending shocks, so if you need long term
care... That can derail a retirement plan. So you want to think about
that. Should you use insurance? Should you think about home equity as a
safety net in that case? We've all seen those scary statistics that show
you you need to have a couple hundred thousand dollars budgeted for healthcare
in retirement, but if you look at that yearly... And that is for
a couple, by the way, if you look at that yearly,
the typical person might spend something like 5000 to 10000 per year,
more on the lower end in the beginning of retirement when you're on
Medicare, and it moves up to the higher end as your healthcare costs increase,
but if you can budget for that and spend that out of your
cash flow, then it isn't quite so bad. That said, a long term
care event can really be problematic. Now, what about taxes? We haven't
even talked about that yet. So you've got an income of 50000,
it comes from Social Security and withdrawals, let's just assume that all
of that money is in a pre tax retirement account, so you haven't
done any Roth, and all of that money might add to your taxable
income. The good news is that at a 50000
level, the taxes are relatively small, so this is an over simplified calculator
here, but we're just going to walk through it. You're a single person,
no dependents, and we've got your taxable IRA distributions. There's the
22000 or so, and your Social Security of about 28000, and some of
that is going to be taxable, so they're looking at about 28000 is
showing up in your AGI. But you're going to have a standard deduction,
single person this year, of course, this is going to change from year
to year, so check with your CPA, that brings your income down fairly
low, and then the actual amount you need to pay in taxes is
less than 2000 using this calculator. So that might be a surprisingly small
amount. The fact is that if you can keep your income at a
reasonable level, you can actually manage your taxes pretty nicely. So,
now you know how to do some of these calculations for yourself.
I hope you found that helpful. If you did, please leave a quick
thumbs up. Thanks and take care.