My wife and I are both 65 years old. She will retire this year and I will work until I am 67. We will receive about $42,000 in Social Security and have about $1 million in savings. Can we live on $90,000 a year?
-Terry
$90,000 per year would be more than I'm comfortable with as a general rule. However, whether it works for you is highly personal. I'm going to outline some things you need to consider before deciding whether you're willing to spend $90,000 a year. (If you need more help planning for retirement, consider working with a financial advisor.)
Do your fees include taxes?
Will the $90,000 you expect to spend each year cover your annual tax bill, or how much do you plan to spend after taxes? The answer to this question is crucial. If the latter is the case, you'll need to withdraw more of your savings each year, further emphasizing the longevity of your portfolio.
Whether your savings are held in a tax-deferred account, a Roth account, or a taxable account matters. I'm assuming your money is mostly tax deferred, meaning it's held in 401(k)s and IRAs. When you start withdrawing the money, you have to factor in the income taxes you owe. If a significant portion of your assets are in Roth accounts, your distributions are tax-free, which will simplify the process. (If you need more help managing your retirement savings, consider being matched with a financial advisor.)
What is your investment plan and risk tolerance?
You need to invest according to your risk tolerance. But if your portfolio is too conservative or aggressive, it can put additional pressure on your savings.
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If you and your wife are particularly conservative, this may inhibit your ability to keep up with this level of spending over time.
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If you're too aggressive, you could be exposed to too much volatility, which could also devastate a retiree's portfolio once withdrawals begin.
The 60/40 portfolio has historically been popular with retirees because it allows them to own enough equity to benefit from the long-term growth that is often required over decades of retirement without too much fluctuation. This isn't for everyone, but the point is, if your entire balance is in a term deposit, for example, your money may not grow fast enough. For a 100% stock portfolio, the opposite is true. It's so volatile that one or two bad market years, especially early on, can have disastrous consequences. (A financial advisor can help you find a portfolio of stocks, bonds, and other investments that fit your risk tolerance.)
What is your withdrawal rate?
Many retirement income plans focus on your withdrawal rate. The classic "rule of thumb" is that if you withdraw 4% of your savings in your first year of retirement and adjust subsequent withdrawals for inflation, you can be reasonably certain that your money will last 30 years. I use this word loosely. This is not a hard and fast rule, but more of a guide to understanding safe withdrawal rates in a historical context. Most people should modify it in some way. For example, you may not need or want to plan for your money to last 30 years.
Again, depending on what is included in the $90,000 fee, I think you could easily see a withdrawal rate of around 5%, maybe even higher. This is not necessarily a spectacular thing. However, you need to take some time to understand how your withdrawal rate affects your ability to maintain spending without depleting your savings too quickly. (If you need help determining the appropriate withdrawal rate, this tool can help match you with a financial advisor.)
bottom line
Whether your savings and Social Security benefits can cover $90,000 in annual expenses depends on a variety of factors. You need to consider whether you need $90,000 before or after taxes, and take into account your investment portfolio and risk tolerance. You'll also need to figure out what withdrawal rate you'll need to support your spending needs in retirement.
Tips for finding a financial advisor
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Finding a financial advisor isn’t difficult. SmartAsset's free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which one is the best fit for you. If you're ready to find an advisor who can help you achieve your financial goals, get started today.
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Before choosing one, consider several advisors. It's important to make sure you find someone you trust to manage your money. As you consider your options, you should ask your advisor the following questions to ensure you make the right choice.
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Keep an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid—held in an account that is not at risk of large swings like the stock market. The trade-off is that the value of liquid cash may be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts at these banks.
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Brandon Renfro, CFP®, is a SmartAsset financial planning columnist who answers reader questions on personal finance and tax topics. Have a question you'd like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and he has been compensated for this article.
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