Retirement Answers

Jacob: 00:02

How much income will I need in retirement? This is a tough one to answer. There's no exact or perfect fit here. A lot of people try to use rules of thumb, which in my opinion, they're not the best, they're somewhat bad. You need to understand your specific income needs more than follow general rules of thumb.

Jacob: 00:21

Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there, my name is Jacob Duke, and each week I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show. Hey friends, and welcome back to another episode of Retirement Answers.

Jacob: 00:48

My name is Jacob Duke. I am your host as always. This week we wanna answer the question of how much income will I need in retirement? This is a question that comes across my desk all the time. Many people are asking, Jacob, how do I actually figure out how much money I'm going to need?

Jacob: 01:02

I have an idea kind of of what I spend now, but is that going to be the same in retirement? Is it going be higher? Is it going be lower? What's the best way to figure out how much money I'm going to be spending every single month in retirement and what can I do to plan for it? So that's the question we're gonna answer today.

Jacob: 01:16

But before we jump in, I wanted to highlight this week's listen review and it comes in from z three thousand. He says amazing podcast, really it's a must listen. He gives the show five stars and says This podcast is great. Great episodes every time. Jacob has answered so many of my retirement questions.

Jacob: 01:32

Lately, he's been creating supporting materials and he'll send those to you to help explain more details from his podcast. No ads and so many concepts covered and pitfalls pointed out. Highly recommend. Thanks Jacob for such a great podcast. Well, I'm glad to hear that you've enjoyed the show and it's been beneficial for you.

Jacob: 01:49

Also glad to hear that you are benefiting from those supporting materials such as handouts or templates or things that I often give away here. So if you're like this person and you are enjoying the show, please give me a rating there on Apple Podcasts and a written review that helps other people just like you find the show and learn from these same ideas and topics. Okay, with that, let's go ahead and jump in so we can answer the question, how much income will I need in retirement? Now, is a tough one to answer. There's no exact or perfect fit here.

Jacob: 02:18

A lot of people try to use rules of thumb, which in my opinion, they're not the best. They're somewhat bad or maybe not even helpful at all. Things like 80% of your income, meaning you know you're gonna need 80% of whatever your current income is before retirement. That's how much you will need in retirement to keep your same standard of living. You're gonna have distribution rate rules such as a 4% rule or something like that saying, if you take 4% of your portfolio for the rest of your life, you'll never run out of money.

Jacob: 02:45

Others say, well, in order to have the income you need, you need to have 10 times your salary saved. And, all these things are not necessarily harmful, but they're most of the time just not helpful. I find that most people don't really fit in the box or they're not cookie cutter and their way of living is unique to them. And so the rules of thumb are typically over generalized. And I would say that, you know, you need to understand your specific income needs more than follow general rules of thumb.

Jacob: 03:12

Here's some maybe, examples of how this is not helpful, right? I talk to people all the time, and one person will say, Jacob, I'm spending about 35% of my annual income right now. Another person might say, Jacob, I'm spending more than my annual income. And so you have this range of 35% all the way up to maybe even 120% of someone's income. And so they're not going to fall into that 80% rule in retirement.

Jacob: 03:36

And so it's not necessarily helpful. We've got to tailor their income needs to their plan. So my approach is not to put you in a box. I don't want to say what you can or can't do based on these rules of thumb. We need to maybe use the rules of thumb as like a way to check us and kind of what we're planning.

Jacob: 03:48

But I think it needs to be tailored to you and less cookie cutter. So another rule that a lot of people refer to is the 4% rule. That's really more about a distribution rate out of your portfolio and mathematically it makes sense, but it also does assume quite a bit. So typically I see people with a higher distribution rate early on in retirement. So in the go go years and that distribution rates typically going to decrease over time as things slow down, maybe we're traveling less, maybe we're doing less every day.

Jacob: 04:17

And so following that 4% rule might hurt you, in a non financial way. It might hurt you, in the fact that you might not get to enjoy life the way that you had hoped to. So instead of following these different rules of thumb, I would say figure out how much income you will need specifically, or how much you would like to spend. And then I suggest customizing your income plan based on your needs. So how do I do this?

Jacob: 04:39

The first thing you gotta know is you've gotta know how much you spend. And that's the hard part for a lot of people. A lot of people just have no idea what they're spending every single month or year. And it takes a little bit of work to figure that out. So how, what do I suggest?

Jacob: 04:52

I say go back over the last twelve months, grab all of your financial statements, your credit cards, your bank statements, figure out how much money has gone out of your possession every single month over the last twelve months, average that together over that time period, and that will give you the average amount of money you spend on an annual basis. Now that's over the last twelve months. So if you can do this over, let's say a twenty four month period, that's even better, right? So just know that we're trying to figure out how much you spend on average. The key here is we don't wanna leave out all of the one offs.

Jacob: 05:24

For example, maybe Christmas gifts or birthday gifts or whatever it might be. We don't wanna leave that out because those things will happen, whether it's the exact same thing happening again, or it's a different type of one off. Regardless, we want to leave that included. So don't try to skim this number down or back this out. Just say, hey, here's how much money we spent.

Jacob: 05:44

Here's the average over the last twelve months. That's our monthly spending over that time period. And then once you know that number, you can kind of take it to the next level and say, now that we know what our average spending is over this time period, let's figure out what our base income needs are over this time period. So you've kind of got to develop two numbers in my opinion here. You need to know how much you have spent, whether that's, you know, discretionary spending on things that are fun, food, travel, whatever it is, but also how much do you need to survive?

Jacob: 06:10

So that might be a mortgage payment, it might be a car payment, it might be gas, the bare minimum amount of food that you need to buy every single month. What are the base or minimum expenses that we have to spend every single month to stay alive? We want to know that number, so that's the bare minimum, but then we also want to know how much we're actually spending. And so there's going be a delta there. There's going be a difference between those two things most likely.

Jacob: 06:32

And what this is establishing is this is establishing a range of income opportunities. So if you had to in the future, you can know, hey, I can pull this back all the way down to let's say 3,000 a month. That's my base income needs in retirement. Then you also have, let's say it goes up to 8,000. That's how much you normally spend on any given month.

Jacob: 06:51

Well, now you've established this $5,000 delta or range of income on a monthly basis that you know you can operate within. So you have how much you'd like to spend, let's say being 8,000, but you also know you can't spend less than 3. So you've gotta be somewhere above 3, but perhaps less than 8 or about 8,000 to enjoy the life that you wanna live. So that's the first thing. We've got to, identify the minimum amount of money we have to spend, and then also identify what is it that we are currently spending.

Jacob: 07:19

Now, once we found those two numbers, we need to compare how much we are currently spending on a monthly basis to how much our portfolio or our income plan in retirement will support. So what we're really trying to figure out is can our average spending continue in retirement or can we spend more perhaps, Or are we going to have to spend less? But the key here is you can't know if your portfolio is sufficient or your income plan in retirement is going to be sufficient if you have no idea of how much you're spending. So you got to know how much you spend. Also know how much your bare minimum or basic expense needs are.

Jacob: 07:51

And then you can figure out, hey, will my portfolio support this? So think of these two numbers that we're talking about here as your spending guardrails on the low end and the high end. Now, other things to think about here is if go into this and you're trying to establish, hey, I spend $10,000 a month, every single month right now before retirement. Well, you have to think about, hey, do I have a mortgage included in that? And is that mortgage gonna be going away either before retirement or shortly after retirement?

Jacob: 08:15

What about a car payment or some sort of other debt payment? Are those gonna continue for a decent amount of time or are they going away fairly quickly? So we kinda wanna customize this to you again and say, we've got our amount of spending we spent over the last twelve to twenty four months, but is that gonna continue into the future? That's really the question, right? Because some people are gonna pay off their mortgage right before retirement, some are gonna pay just a couple months into retirement.

Jacob: 08:39

And so we want to make sure that we get an accurate spending expectation in the future. Also, we've gotta think about, hey, are we going to have another large expense coming up in the early stages of retirement, such as maybe having to buy a new car. Many people have company cars, and so they've gotta, if they retire, they're no longer employed, therefore they've gotta go buy their own car. So we have to factor that into the spending plan, average out that purchase over a certain amount of time. Also, are we adding new expenses such as trips or vacations or, just retirement spending in general so that we can go enjoy life?

Jacob: 09:10

So your income needs or spending might be higher in retirement based on these additional goals that you're going to set in place. So that goes back to the fact that, you know, a standard rule of thumb might not be helpful, right? So if you need less income in retirement, well, you're gonna be spending more, then that doesn't help you out really, it doesn't make sense. So we've gotta understand and think about these different factors, you know, to know, are we gonna be taking, an expense away in retirement such as paying off a house and no longer having a mortgage? Or maybe we have to have a large purchase such as buying a car, or maybe we're adding additional spending on an annual basis by doing vacations or travel or whatever it is we wanna do.

Jacob: 09:44

So we gotta factor those things into our spending and how that relates to what our spending level is right now. So that's how I would approach this. Now, a lot of people are wondering, well, hey Jacob, what is the average spending amount that you see retiree spending? And again, it ranges, but if I could narrow it down, would say it's anywhere between 5 and $10 a month is the average expense for the retiree that I work with. It's somewhere in that range and that's dependent again on a few different factors, how much fixed income they might have, whether it be from pensions or social security.

Jacob: 10:14

It also might mean, hey, we don't have any mortgage payments. Some people do have mortgage payments still. So it really is dependent, but I think that 5 to $10,000 range is an average over, most clients that I work with in terms of their monthly spending. Some are gonna be higher, some are gonna be a little bit lower, But maybe that's helpful for you if you're kind of in that range, you know, just know you're kind of on par with a lot of other people. But just know that retirement spending is a moving target.

Jacob: 10:37

I think it's gonna change over time. Most of the time I see that, people spend more early on, like I mentioned earlier, and then less in the later years and perhaps some additional health costs towards the end of their life. But really the idea here is we wanna get an idea of what your income need is based on your current spending. So how you're currently living life. And then we wanna also establish what are your base or minimum income needs so that you can meet your basic needs to stay alive.

Jacob: 11:02

And so we have two different numbers. Once we know those two, we can identify, are we in an appropriate range based on our portfolio, based on our income plan? And then we can say, hey, what adjustments do we need to make? We gonna have to spend less in retirement because we don't have enough saved? Maybe we can spend more than we otherwise thought we were gonna be able to because we've gotten more saved than we thought we should.

Jacob: 11:22

And so, all these different things are gonna factor in, but just know that you've got to look back in time. Also anticipate some future either expenses that are coming up or some things that are gonna be taken out of your past spending. Make sure you do that appropriately and then I'll give you a fairly accurate number, and just know that this is a moving target. It's gonna change over time. You can't set it in stone and forget about it.

Jacob: 11:41

It's gonna be updated year after year. It's gonna increase sometimes, it's gonna decrease sometimes. But over time I think that, as you go through your retirement years, your spending will decrease. It's just a matter of when that decrease is gonna start and that's most of the time dependent on your health. So hopefully this is helpful for you.

Jacob: 11:59

I hope that it makes sense in terms of how I like to emphasize this or encourage people to figure out their spending amounts and then be able to apply that into their retirement plan. If it was helpful, again, a rating review there on the podcast platform that you listen through. If you're on YouTube, subscribe and give the video a thumbs up. With that, thank you for tuning in to this week's episode of Retirement Answers. My name is Jacob Duke.

Jacob: 12:20

We will see you next week. Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show. Also, wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice.

Jacob: 12:44

Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.