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Determining Retirement Income Needs - Part 1

Determining Retirement Income Needs - Part 1

| January 03, 2024

Last month, we discussed managing the emotions that come with retirement, and in November, we talked about determining how much you need for retirement and the formula for that. We will revisit that this month as we talk about how to create growth opportunities within your investments that will help generate some of that income. We’ll also talk about the heart of a retirement financial plan -  your retirement date and specific dollar amounts that go with that date, and other important ones in future stages of your retirement. 

Reviewing the Formula

Let’s start with a quick review of the formula we use to determine how much you need for retirement. This is how we get to that BIG overall number, the amount you will need to save to achieve and maintain the retirement lifestyle you desire.

Using the list of income resources you created in November, we start with your pre-retirement salary, assuming you are going to want to have the same level of income in retirement. Next, we take your estimated Social Security Benefit and subtract that from your pre-retirement salary. Last, we multiply the number you get after subtracting social security by 0.45, which is your estimated average annual investment return. 

Pre-Retirement Salary - 

Projected Annual Social Security Benefit x 

Estimated Average Annual Investment Return = 

Your Retirement Number

Now, let’s revisit our example from November. We have a couple that needs $100,000 a year in retirement income. They will each get about $25,000 a year in Social Security, so that’s a total of $50,000. So they’ll need to come up with another $50,00 a year from their retirement plans and return on their retirement investments to get to that $100,000 per year number. Plus, we need to add that 3% a year to accommodate for inflation. So, keeping with this example, we want to have their retirement investments grow at an average of 4.5% per year.   This is what their numbers plugged into our formula look like - $100,000 - $50,000 x 0.045 = about $1 million.

Getting to Your Number

Your investment asset allocation should support the income you need, so next, we need to determine what your income needs actually are. How do we do that? We create a date-specific and dollar-specific income plan that will support your retirement goals. After that, we have some numbers to work with and can create the right asset allocation to fund your income needs. But here’s the thing - I am going to redefine how you think about asset allocation. I’m sure you are all familiar with all those nice pie charts labeled conservative, aggressive, etc.. that advisors and investment gurus use to talk about how to allocate your portfolio. 

They aren’t for real people - your allocation needs to be tuned exactly to your life, your goals, and your needs. How do we do we figure out what those are? We start by understanding your risk tolerance. This, along with the dollar amount you need and your specific timeline, will help us determine the right allocation for you that will get us the average annual return you need to make your specific number happen. 

More on that next week.

Until next time…

One last thought: We believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.


1 What Is Retirement Planning? Steps, Stages, and What to Consider 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. 

All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.