Published On: August 21, 2018
Written by: Ben Atwater and Matt Malick
For financial advisors, spending can be a taboo topic. However, through much experience with retirement income projections, we’ve learned that spending is, by far, the most important variable for a successful retirement plan.
For example, a client spending $250,000 per year in retirement might need in excess of $6 million in assets to retire, while a client spending $50,000 per year in retirement might need significantly less than $1 million.
Obviously, every situation is unique and these generalizations depend on a number of factors, among them Social Security, pensions, deferred compensation, inheritances, Medicare, etc. It is important that everyone establishes a retirement plan that is distinct to their needs.
An actual client example using our financial planning software, Money Guide Pro, further illustrates this point. The client we’re highlighting plans to retire in about three and a half years, has about $1 million invested in balanced portfolios and is entitled to $53,000 per year in Social Security benefits (all in today’s dollars). Using a Monte Carlo analysis, a statistical process of evaluating the probability of different outcomes, the below table illustrates the client’s probabilities of success at various levels of spending:
Spending before retirement sets the tone for the second most important aspect of retirement planning, the size of your retirement nest egg. Obviously, the less you spend during your working years, the more savings you will have for retirement, all things being equal.
Spending, whether during retirement or before, is an incredibly broad subject, so we’d like to focus on some of the mistakes we see, as well as some ideas for setting-up a successful spending equation.
Tips for Successful Spending
Just as there is an enormous difference in the amount of retirement savings you need based on your spending level, like the $250,000 versus the $50,000 example we cited above, saving for retirement entails similar mathematical realities. If you save $20,000 a year for 45 years and earn an average of 5% per year, you’ll accumulate $3.2 million, but if you save $30,000 under identical circumstances you’ll accumulate $4.8 million.
Although we write a lot about investing, the heart and soul of retirement planning is spending and saving.
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