Of all the financial questions that we answer for clients, there’s one that tends to come the most often… “When can I retire?” Now, the word retirement can mean something completely different for everyone out there. Some people may find joy in working until 65 years old and finally walking away from work for good and never earning another dollar. Others may view retirement as walking away from a big corporate job and slowing down in life in their mid-40s or 50s while working part-time. There’s not a thing wrong with either path, plus there are many variations from person to person! But, when it comes to the question of “how much do I need to retire?”, there’s a lot of variables that can into play. A part of every conversation is the 4% rule.

The 4% rule is a heavily studied financial industry standard for how much you can withdraw from a portfolio of investments to provide income for the remainder of your life, plus increases for inflation. So, if one has $1 million saved up in a portfolio invested in stocks and bonds, the calculated withdrawal would be approximately $40,000 per year. $2 million saved up? $80,000 per year. And the list goes on. What’s the math here? Well, if your long-term annualized rate of return can get close to 6-7%, and you’re only pulling out 4% per year, there’s a built-in buffer for those down years in the market when you still need to live off of your savings.

But that doesn’t necessarily answer the question of, “What’s my magic number?” Because usually, retirement has many forms of income coming in. One could have social security, rental property income, part time work, or even the rare pension. Combine all these together and it alleviates a lot of pressure on needing to have such a larger portfolio saved up.

Let’s say someone needed $10,000 a month to live off in retirement (including taxes). That’s $120,000 per year. First, we can back out some forms of guaranteed income: $2,500/month of social security, $1,000/month in rental property income, and $2,000/month in part time work. In this scenario, we’ve got $5,500 of income coming in and we only need $10,000/month… we’re halfway there! How can we meet the additional $4,500/moth of income? That’s $54,000/year, or $1.35 million in a portfolio if we back into the 4% rule. So, instead of needing $3 million in a portfolio to meet $120,000/year, we only need $1.35 million in a portfolio in this scenario since there’s so many other sources of income coming in.

If only every scenario were this simple! Everyone’s retirement situation is so different and there’s always many variables. What if I only want to work part time for 10 years then fully retire? What if I want to delay taking social security until 70 years old? What if my company takes away my pension? What if the stock market enters a bear market and the economy goes into a recession the year I retire? These are all questions we hear and work through, it’s just not as easy as answering it in a blog post since the answers are so dependent on one’s personal situation!

This doesn’t necessarily answer the question of what your magic number may be, but hopefully it gives some insight on how you can softly calculate it. Fortunately, we love working through these scenarios for clients and have some cutting-edge software to really illustrate how possible retirement can be. If that’s something we can do for you, please let us know and we’re happy to help guide you into retirement!

Any opinions are those of the author and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. The examples included are hypothetical for illustration purpose only.  Actual results will vary.


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