Experts say you will need 80% of your pre-retirement income after you retire.  I have never understood this philosophy.  Why would I want to retire and then live on less money than I did my entire life?  This begs the question people always ask me – “How much money do I need when I retire?”

Unfortunately, the answer is, it depends.  The reality is, the question shouldn’t be “how much do I need to retire” but rather, how much income do I need to retire? Having $5 million, but an inability to understand and embrace risk could mean this person only generates $100,000 because they have a 100% government bond portfolio paying 2%.  If you have $3 million, and you generate a 4% return, you are creating 20% more income than the person with 66% more money.

Taxes matter too.  If the person with $5 million has it all inside a 401k, every dollar that comes out will be taxed at ordinary income.  The individual with $3 million has half in a ROTH IRA (no taxable distributions) and half in their checking account that has already been taxed which can be invested in a very tax-efficient manner.

A simple rule of thumb that the financial planning industry has created is the 4% rule.  This rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976.  This period endured severe market downturns in the 1930’s and early 1970’s and proved that during unwarranted market cycles, there were no cases in which this withdrawal rate of 4% exhausted a retirement portfolio in less than 33 years.

If you currently live on $10,000/month after-tax, and you want to enjoy the same lifestyle as today, you will need to have between $3,333,333 and $4,000,000.  The difference in dollar values is based on tax status of your monies.  If you currently live on $20,000/month after-tax, you will need between $7,000,000 and $8,500,000. 

Here are some of the major factors that can impact your future value need in your nest-egg:

  • What % of your money is ROTH vs. Traditional?
  • What % of your money is a Traditional 401k/IRA or brokerage account?
  • What investment strategy and distribution strategy will you implement in retirement?
  • Will you own real estate that might produce higher after-tax rental income rates than the 4% stock market withdrawal rule of thumb?

If you want a customized, tax-efficient future distribution plan, don’t be afraid to reach out.  You can follow us @lifemanaged_ or subscribe to our blog to get more of these tidbits.

*Athanassios Panagiotakopoulos is an Investment Advisor Representative with Dynamic Wealth Advisors dba Life Managed. All investment advisory services are offered through Dynamic Wealth Advisors.

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