One of the biggest questions we get at Toujours Planning is, “How do I pay the bills after retirement?” For many of us, especially Baby Boomers who are entering retirement age, this question can be overwhelming.
For most retirees, there are two choices to support their income after retirement:
- Social security
- Savings (including IRAs, 401ks, etc.)
Some people may have a pension, but this is becoming more and more rare. On top of that, Social Security payments average out to approximately $1,400 per month (per person). For many people, that may not be enough money to live on.
That’s why we don’t recommend planning your retirement around Social Security. Instead, we recommend considering your 401k, IRA (traditional or Roth) and overall savings. These accounts, and the interest you accrue from them, will often be what carries you through retirement.
But how much do you need in these accounts?
Calculating how much you need for retirement
If you’re nearing retirement age, you’re probably looking at your savings and retirement accounts wondering, “Is it enough?” When we work with our clients, we help them calculate how much they need to retire – and then make sure they have enough.
To calculate this, we look at:
- Estimated life span
- What income you’ll need during retirement
- Expected inflation rates
- Where your money will be coming from (pension, Roth, 401k, etc.)
- How much money you have saved up
This gives us a better picture of what you need (and already have) so you don’t outlive your money. From there, we work with our clients to figure out how much more money they need to save before retirement and which accounts they should pull from once they do retire.
Which accounts should you use for retirement?
There are a number of factors that determine the best withdrawal plan for each retiree. These include:
- Each account’s “age of withdrawal”
- Overall interest accrued by each account
- Market volatility
We do not recommend pulling from just one of your accounts until it’s gone; instead, we create a diversified withdrawal plan that takes into account all of the above. Being aware of the taxes involved in withdrawing from certain accounts, as well as penalties for dipping below certain account levels, are also important factors here.
Start focusing on retirement today
If you retired today, how much income would you need per month?
While there are a number of options to reduce your living expenses and financial responsibilities, it’s important that you have a realistic expectation of what you need to live. Once you have that number in mind, it’s time to make sure your accounts can accommodate your lifestyle.
To figure out if you have enough currently in savings, Dustin has a good rule of thumb: “Total up all your savings account. If you can live on 4% of that, that should carry you so you can live mostly off the interest.”
If you can’t live on 4% of your accounts, you’ll want to work with a financial planner to create a savings plan that gets you there – and you may need to reevaluate your needs to create a more realistic retirement.
Our best advice? Keep saving. If you haven’t started, start now. If you work with the goal of a comfortable retirement in mind, you’ll be more likely to relax when the time finally comes.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through GWM Advisors, dba Toujours Planning, a registered investment advisor. GWM Advisors and Toujours Planning are separate entities from LPL Financial.