Retirement Answers

Jacob: 00:02

Stop comparing yourself to others. Don't listen to the rules of thumb that you might find on the internet. A plan, having a plan that's custom to you is invaluable because you can know what your situation needs and how you can meet those needs to have a successful retirement, and then everything comes down to spending. 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.

Jacob: 00:31

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, welcome back to another episode of Retirement Answers. My name is Jacob Duke, I'm your host as always. This week on the show, I wanted to talk through a common question that's in the back of every retiree or pre retirees mind.

Jacob: 00:58

And it's the question of how much is enough? Do I have enough saved? How much do I need to have saved for retirement? So we're gonna attempt to tackle that question. And my goal today is to give you a framework to help you answer this question for yourself, because we're gonna find that this is a really hard question to answer, and the true answer is as well, it depends.

Jacob: 01:17

And so that's not a fun answer for someone who's trying to solidify their plan for retirement, but we're gonna see here in just a moment a framework that you can use to help figure out what is enough for you, specifically in your situation. So why are we even talking about this question? Well, it's the question that's on everyone's mind. Basically, the biggest fear for retirees is running out of money, and what this question is answering is, is how much do I need to not run out of money? In fact, a recent Gallup poll revealed that sixty four percent of Americans are worried about not having enough money for retirement.

Jacob: 01:48

And so all these fears around how much is enough and kind of the the fear that comes with maybe running out of money one day is completely valid. So if that's something you're feeling or questioning, don't feel like you're alone. It's on the top of every retiree or pre retiree's mind. So I've talked about this before, but the mental shift, the thing that has to change most when it comes to retirement, is not so much your spending habits necessarily, or your investing habits. What actually is gonna be the hardest thing to shift is going to be your mind.

Jacob: 02:16

For the longest time, you have been hopefully an accumulator. You've been growing and building your assets, you've been saving into your four zero one ks, your IRAs, your Roth IRAs, your brokerage accounts, you've been building up assets over time. And so you've kind of ingrained this personality trait, if you will, into who you are. And it's like, I'm a saver, I'm an investor, I'm trying to grow this thing for the future. Whenever we decide to retire, what we're actually doing now is we're signing up to spend all of those assets or the wealth that we've accumulated over these twenty, thirty, forty plus plus years.

Jacob: 02:46

And so now we're we're having to do this mental shift. We're having to go from saver and investor to spender. And so this is often the hardest shift mentally for most retirees because it's very unnerving, it's not very fun to watch your account balances potentially go down in value, whether it be from a market decline, that's always a hard thing to go through, but also through spending. And so, this is the hardest part. And so what we're really trying to identify here is how much do we need to have saved to spend down our portfolio effectively and still never run out of money.

Jacob: 03:17

So I talked about this as well. One of the biggest risks is a lot of retirees end up not spending enough. So And I'm gonna talk about this here in a second, how some of my clients actually never spend majority of their money. But that is a common or big risk is not spending enough out of the fear of potentially running out. So what we're really trying to do with this how much is enough question is find out how much do we need, and how much can we spend, and never run out before we pass away.

Jacob: 03:40

So that's what we're gonna walk through here in a second. I'm gonna give you a framework to help navigate this for yourself. So how much is enough? Like that's really the question, like how much do I need to have saved? Is $1,000,000 enough?

Jacob: 03:49

Is $3,000,000 enough? Is $5,000,000? $500,000 How much money do I actually need to have to my name, save for retirement, to make sure I have a successful one? And the answer is, I've already talked about, but the answer is, well, it depends. And that's not a fun answer, but it's just the truth and the reality.

Jacob: 04:05

And if I can offer you any encouragement with that answer, it's gonna be, you probably need less than you think. And just anecdotally here, I haven't found or had any clients that have actually spent all their money. In fact, I have a few older clients who are above age 90, and most of them have way more money than they'd ever need, and they actually never spent all of it. And so I think there's a couple things that are at play here. There's a couple things on the mathematical side that are at play, but also a psychological thing that is at play.

Jacob: 04:33

Number one, as you get older and you grow into the later years of your retirement, what's gonna end up happening is you're probably gonna be going less. So we talked about the first five to ten to fifteen years of your retirement being what we call your go go years. This is the time to go travel, explore, do what you want to do, like whatever that dream retirement looked like, that's the time to go do it, because you're most likely gonna be your healthiest in those years. Now, as you age, your spending, in terms of your discretionary spending, is probably gonna be going down. And so also by this point, you most likely don't have a mortgage, you probably don't have a car payment.

Jacob: 05:07

Overall, your monthly expenses have gone down drastically, probably as you've aged. And so what happens here is people, if you don't spend enough in the first ten to fifteen years of retirement, you have way too many assets on the back end, which means that is that risk, yet again, you didn't spend enough early on. So, what we've got here is, you know, most people end up not spending enough throughout retirement, so they end up with this large sum of money, whether it be in tax deferred accounts, or brokerage accounts, or Roth accounts at the end of life. And I find that the math just doesn't actually say, hey, I need a certain amount of money every single month for the rest of my life. It just doesn't work that way.

Jacob: 05:42

But I think another factor at play here is from a psychological standpoint, in terms of not running out of money. Let's say that you've spent some of your money in that account balance or your your overall wealth is going down in value. Once you get to a certain point, you as a human, psychologically, as someone who's saved and built up your wealth over time, I feel like most of the time we will never let ourselves get too low in terms of how much money we have saved. This is something where it's like, hey, I've got to a certain threshold, I cannot spend more than I otherwise have to to get to the next month or live because I can't stand to see my balances go down less than that. Think of this maybe as a parallel to maybe a emergency savings or a sleep at night cash amount.

Jacob: 06:24

Some people it requires $10,000 to sleep at night they have to have at the bank. Other people need $250,000 to sleep at night, you know, in cash. And so every person has a different range or level here. So from a psychological standpoint, I found that many people just simply can't allow themselves to spend their assets all the way down, which means you won't run out of money if that's kind of the nature that you have. So that's maybe some thoughts there on why you might need less money than you actually think in retirement.

Jacob: 06:51

The math actually dictates you probably won't spend as much as you think, and then also psychologically you won't allow yourself to spend more than you otherwise should. Now, back to how much you actually might need to retire successfully. This is all going to be completely dependent on your situation. Some people spend only $3,000 a month. Some people spend $20,000 a month.

Jacob: 07:10

Some people have health situations where it costs more money and some people don't. Some people wanna prioritize leaving a legacy to family or heirs, and some people wanna die with $0. Some people have pensions, some people have disability income, and some people don't. And so everyone's situation is different and there are just a number of variables that are gonna change or have to be factored in here to answer the question of how much is enough. So this is why I always emphasize that you have to have a plan that's custom to you, rather than following some just common rules of thumb and multiplying your age by a certain number and seeing how much you have to have, or multiplying your income by a certain amount and seeing how much you need to have saved.

Jacob: 07:47

All that might be helpful, but it just will not get you the answers that you're looking for. So everyone's situation is different. And the reason that I can confidently say that your situation is different from someone else's, even if you might have the same amount of money in the same account types, invested the exact same, you spend the same amount every time. What's gonna happen here is the different variable is the fact that you are involved. So you are unique and different from the person that you're comparing yourself to.

Jacob: 08:12

So your dreams, your goals, your wishes, whatever you're trying to do, and your desires, they're all different from each other, even if you have the same financial situation. So the variable that's different is always you, that's why you have to have a custom plan based on your specific needs. So with all that said, I wanna give you a framework to help you figure out how much is enough for you. So here is the framework, I wanna explain it to you, and then we'll walk through these each each step one by one. So the first one is you need to know how much you have saved.

Jacob: 08:41

The second one is you need to know what other sources of income you might have in retirement, such as a pension or social security. And then also, you will need to know how much you are going to spend in retirement. So again, I've talked about this before from a spending standpoint, I like to have two numbers. How much you need to get by to the next month, so your bare minimum spending, but then also your desired spending. So two different numbers, we wanna know both of those.

Jacob: 09:04

So let's start first with the last one that I mentioned. How much you're gonna spend in retirement, and then we'll go back to the other two. So, for spending. You have to know this number. You have to know how much you're gonna be spending on a monthly basis from a you have to spend an amount, but then also what is the additional top that you would like to spend.

Jacob: 09:19

And the reason that this is so important is because everything in retirement around your success and the success of your plan comes back to spending. It always comes back to spending. So if you spend a ton of money, that means you need a ton of money. If you don't spend much money, that means you don't need as much. So, how much do you want to spend?

Jacob: 09:36

How much can you spend? What is the minimum amount you've got to spend to go to the next month and just survive another day? Those are the kind of numbers that we wanna look at. So maybe spend $5,000 a month or maybe spend $10,000 a month. Regardless, you have to know how much you're spending and what that will look like.

Jacob: 09:51

So what you could also do is say, hey, what's my current spending right now before retirement? But then you can evaluate what will it be in retirement. Perhaps you have a car payment that's gonna be finished before retirement, maybe your mortgage will be paid off, maybe your spending will go down in retirement, or perhaps it will even increase. And so all these things and factor them in, that is what you have to do when it comes to evaluating your spending. So the second thing is, is how much do you have saved?

Jacob: 10:15

Once So you've got that spending figured out, you've gotta begin to analyze how much can I spend based on how much I have saved? So if you have $500,000 saved and you need to spend $5,000 a month from that nest egg, well, the math probably won't work out very well on that equation. Now if you've got $3,000,000 and you just spend $5,000 a month, you've got more than enough to meet those spending needs. So you've gotta know how much you're spending and then evaluate that compared to how much you have saved. And so what I'd like to encourage you to do here, is figure out how much you have saved, and then say what can this portfolio produce from an income standpoint.

Jacob: 10:49

Now there's a bunch of different rules out there, and the most common is the 4% rule. I probably encourage you to use maybe the four and a half percent, or even stretch it all the way to 5%. Now, reason I can say that is maybe because if you invest those assets properly along the way, you might can have a little bit more leeway there in terms of not only spending just 4%, maybe slightly more. So evaluate how much you can actually spend on your portfolio and how that compares to how much you would like to spend. So if your portfolio says, hey, can spend about $30,000 a year on my portfolio, but I was hoping to spend 50, means we have a $20,000 gap there.

Jacob: 11:22

That has to be made up somehow. Now the third step in this is, what other income sources might we have in retirement? So the first things that come to mind are social security, it might be a pension, it might be disability, it could be rental income, anything else that's sending money to your bank account that you can spend every single month. And we've got to also figure out when are those sources turning on. So if you retire at 60, and your social security, it could start at 62, but you could delay it all the way to 70, you've got to factor that into your plan.

Jacob: 11:49

Am I going to spend more for my portfolio in the early stages of retirement, so that I can have a higher income in the later stages. You gotta determine that for yourself, and this all goes into the custom plan that you should be building for yourself. So what other income sources do you have? That's gonna be the final factor, because going back to what we just talked about a second ago, if you need $50,000 a year, your portfolio can generate 30 safely and send that to you. That means a $20,000 gap or shortfall needs to be made up.

Jacob: 12:16

Hopefully that social security or a pension or something else can fill that, therefore your total income needs can be met. So I wanted to look at a couple examples here, just to show you that how much you need should not be a singular number. A lot of people have a million dollars in their mind. Once I get to a million dollars, I'll be able to retire because that's how much I've been told I need to have. Well, that's not necessarily the case, again, because your situation's different and you need to base your retirement plan based on your unique circumstances.

Jacob: 12:42

So, here, let's say that we've got $500,000 and you spend $5,000 a month. That's not gonna work on paper, but if you have a pension that pays you $25,000 a year and you have social security that also pays you $30,000 a year at some point in the future, the majority of your income needs are going to be met by those fixed income sources rather than having to pull all of your income from your portfolio of $500,000. So this reduces the stress or the amount of distributions that you have to take from your 500,000, actually freeing you up to take more so that you can go enjoy that as much as you possibly can. Now, compare that to someone who has $1,500,000 and they're gonna be spending $12,000 a month. They don't have a pension, but they have social security paying them about $36,000 per year.

Jacob: 13:26

And that situation is gonna be a lot tighter for that person because if they're trying to spend $12,000 a month and they're only getting $3,000 a month in social security, that's a $9,000 difference that's gotta be made up by their portfolio. Now, can $9,000 be supported a month from a $1,500,000 portfolio? Well, that could be debated, but there's gonna be a lot more monitoring, a lot more things that have to be done here to make sure that nothing goes awry, because they are pushing the limits on that. So those two examples hopefully show you that $1,500,000 versus $500,000 it doesn't necessarily mean that you will be successful or not successful depending on how much money you have. It's all relative to your other sources of income and how much you were actually spending.

Jacob: 14:06

So hopefully these two examples show you that there's more to it than just having a certain amount of money saved for retirement. You gotta consider a lot of other variables and a lot of other factors. In fact, I have a client that actually has $2,000,000 and they don't need to spend any of that ever because they've got pensions, disability, and social security to meet all their needs. And they make over $11,000 a month in retirement from those fixed sources and they don't need their $2,000,000. So that's another perfect example.

Jacob: 14:31

They technically don't need any retirement savings to meet their retirement goals and quote, succeed in retirement. So here are the big takeaways for today. Stop comparing yourself to others. Don't listen to the rules of thumb that you might find on the internet. A plan, having a plan that's custom to you is invaluable because you can know what your situation needs and how you can meet those needs to have a successful retirement.

Jacob: 14:52

And then everything comes down to spending. Hopefully this is helpful for you as you evaluate your retirement plan, and if you need help building your custom retirement plan, my email and website should be linked down below. I offer a free one time consultation to see if our services might be helpful for you. Other than that, I hope you have a great week and we will talk to you again next time. Hey, it's Jacob again, and I wanted to extend a quick offer to you.

Jacob: 15:18

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. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode.

Jacob: 15:39

Look forward to talking with you again next week.