In retirement planning, two numbers remain crucial:
First, how much will you want to spend after you retire?
Second, how large an investment portfolio have you accumulated?
The ratio of these two numbers generally will determine whether retirement is feasible. For many financial advisors, the maximum draw out they’ll suggest is 4 percent, assuming that a retiree is young and in good health. Someone retiring at age 70 might be a little more aggressive, because of the shorter retirement period, so the initial withdrawal might go up to 6.5 percent or 7 percent.
Under this theory, someone retiring at age 60 with a $500,000 portfolio could comfortably withdraw $20,000, assuming a 4 percent withdrawal rate, while a much older retiree might withdraw as much as $35,000, or 7 percent. (Retirement projections usually assume that these initial amounts increase each year, to keep up with inflation.) Turning these numbers around, in order to retire comfortably, you must accumulate 15 to 25 times the amount you wish to spend annually in retirement, if you want to avoid running short of money.
If your retirement fund appears to be insufficient, as you approach the time you’d like to stop working, you may find it too risky to shoot for higher returns by being more aggressive in your investing. Instead, other options might be evaluated:
* Keep working. Each year you continue to work can help you reach retirement goals. It’s another year in which you can fund your retirement while you’re not consuming assets. If you continue to work, the multiple of spending will go down, when calculating how much is enough to live on, because you’re reducing the time you’ll spend in retirement.
* Sell real estate. Anyone who owns two homes might sell one, to provide money for retirement. Those who own one home might sell it and downsize to a less expensive personal residence; after the sale, you can move to another area of the country where housing is less expensive. The tax code helps because you can sell a house and exclude some capital gains from your taxable income.
* Invest more, spend less. If you keep spending now, after you retire you might be able to take an expensive vacation only every other year, instead of every year. You might wind up driving older, less desirable cars. In general, you’ll have a less luxurious retirement.