How We Think About Portfolio Value and Achieving Retirement Income

How We Think About Portfolio Value and Achieving Retirement Income

A common headline in the financial press reads: “Experts Say You Need X Portfolio Value To Retire.”

These articles must garner significant attention, given their proliferation.

Are they accurate?

We’ve built and executed countless financial plans on behalf of clients.

In this case, the economics of the news business conflict with sound advice.

Portfolio value is important. That said, its importance is relative to other factors.

Everyone retires at different income levels and levels of expenditure.

And every retiree has different income needs.

Some believe they’ll spend far less than their current income during retirement.

Others believe they’ll need their total income replaced.

How do we square the difference between the retiree’s needs and what is possible?

This is where financial planning comes in.

Upon retirement, retirees usually have at least two sources of income:

  1. Retirement assets: 401(k)s, pension income, brokerage accounts
  2. Social Security income

Let’s assume a single retiree would like to receive $70k in retirement income starting at age 70.

A part of that will come from Social Security. Let’s put that value at $38k a year starting when they retire.

The rest of their retirement income, $32k, must come from investable assets.

You may be familiar with our financial planning software if you’re a client. We will aim to maintain a balance in your account through age 95, accounting for inflation. Our software utilizes a Monte Carlo simulation to test how robust your plan is.

That’s all good, but what if you were trying to do a quick rule-of-thumb type estimate?

In that case, do the following: take your retirement balance and multiply it by 4%. This is the 4% rule.

This number is an easy way to estimate how much income you can pull from your retirement portfolio.

Our retiree in the example above needs to generate $32k after Social Security. Working backwards, $32k is roughly 4% of $800k. So, the individual in question should aim for a retirement balance of $800k.

We recommend working with a financial advisor to develop a more robust plan. That said, the 4% rule is a way to conceptualize what your portfolio balance means for your retirement.

Everyone doesn’t have the same income, and not everyone will need the same portfolio size. Some will need more, others less. The key is to save the right amount for your anticipated income needs.

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