Andrew Carroll, CPA/PFS, CITP, and General Manager for NCH Wealth Advisors
Can I Retire? Two Strategies Every Retiree
Needs To Understand
Retirement can be a scary time for many people. It involves a major shift in your financial world! The transition from earning a wage to living off your accumulated wealth can be a tough one to make. Most investors know the value of a dollar; they can tell you exactly how many cheeseburgers, televisions or movie tickets $100 will buy them. This is what I call the income-statement mentality. However, what many people do not understand is how many, and what type of, assets they need to produce $100 per month. I call this the balance-sheet understanding.
It is not that difficult to decide whether you can retire. If you shift your understanding to the balance-sheet perspective, there are just two critical numbers that you need to know: • How much income you need. • Your desired withdrawal rate.
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Step 1: Determine your income needs. This is accomplished with your monthly budget. Multiply your monthly expenses to determine your annual income needs. Don't forget to include one-time expenses such as property taxes, vacations, Christmas gifts, etc. Then subtract your annual income sources, such as Social Security and pensions. The remaining number is how much you need to produce from your investments. |
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| Retirement Income Needs | ||
| Monthly Budgeted Spending | ||
| Monthly Budgeted Spending Annualized | x 12 | |
| Annual Expenses (Property Taxes, Vacations, Insurance) |
+ | |
| Total Annual Income Needed | = | |
| Annual Social Security Payments | – | |
| Annual Pension Payments | – | |
| Annual Income Needed From Investments | = | |
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Step 2. Establish your desired withdrawal rate. The second number we need to know is the withdrawal rate we want to use. The withdrawal rate is what percent of your retirement nest egg will be spent each month. With those two numbers, it is easy to back into your required nest egg. For example, if we use a withdrawal rate of 5% and you need $50,000 of income, then you need a nest egg of about $1,000,000. The withdrawal rate needs to be less than what your portfolio is earning, to combat inflation. |
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| Calculating Your Withdrawal Rate | ||
| Your Estimate of Average Portfolio Return: | 6% | This calculation will allow your portfolio balance, and your subsequent income streams, to increase every year to help maintain the same purchasing power. |
| MINUS: Your Estimate of Inflation | (3%) | |
| EQUALS: Your Predicted Withdrawal Rate | 3% | |
So how do you pick a withdrawal rate? I would recommend consulting with your Financial Planner to decide on a withdrawal rate that will work for your situation. This has been a superficial look at a complex issue. Estate planning, survivor income and investments goals all add complexity. Many investment strategies and products are available to help you plan for retirement income. These strategies should only be used under the advice of a qualified professional who will help you understand them.
ABOUT THE AUTHOR
Andrew Carroll, CPA/PFS, CITP, and General Manager for NCH Wealth Advisors of Fullerton, CA, helps families have confidence in their financial future across the many legal, financial and tax issues they face during these uncertain times. INDEPENDENT CONTRACTOR OF MONEY CONCEPTS INTERNATIONAL, INC. All Securities through Money Concepts Capital Corp. Member FINRA/SIPC 11440 N. Jog Rd., Palm Beach Gardens, FL 33418 Tel: 561/ 472-2000. NCH Wealth Advisors and Money Concepts are not affiliated. These kinds of conversations are all part of our overall services to our clients at NCH Wealth Advisors. Please contact our office if you have any questions: 714/ 459-7020. We are happy to help provide the direction you need. Please feel free to pass this along to anyone you think might benefit from this information. We appreciate all referrals.
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