Should I pay off my mortgage before I retire?
Is the US economy about to go into a recession?
Should I be worried about healthcare costs in retirement?
We hear these questions, among many others, all the time in our reviews. But there’s no contest for the most common question of all: “Do I have enough money to retire and stay retired?” For many of the 10,000 baby boomers that retire every day, it’s a question that won’t get answered until deep into their no-go years, when their long-term timeline is simpler and more predictable. No one wants to wait and see if their retirement will go well, which is why “Do I have enough?” is usually followed up with “How much really is enough?”
It’s a reasonable question, especially because prevailing sentiment still treats retirement like a savings game – have more in the bank and your retirement will be better. Couldn’t be simpler. But that’s not the whole story; though your savings play a role in a healthy retirement, it’s your spending that’s the real deciding factor.
Consider your net expenses, which are your income needs less any pensions, Social Security or other income sources. What amount of pressure are you applying to your portfolio by your withdraws?
Here’s an example: Person A and Person B both have a portfolio of $1 million. We’ll set aside whether or not it’s an IRA, non-IRA and/or 401k.
Let’s say, after all their income sources, Person A needs $3,000 per month generated from their portfolio on which to live. Person B needs $6,000 per month. For Person A, I would say they have saved enough to retire. Person B, however, likely has not.
An extra $3000 a month may not seem like so much, but the strain that will place on a $1 million dollar portfolio will likely break it. In numbers, Person A is putting a 3.6% strain on their portfolio, while person B is putting a 7.2% strain on theirs. If you tested Person B in a decade like the “lost decade” – from to 2000-2009 – it’s very probable they would have to change their habits during retirement.
Beyond savings, there is also your relationship with the market. Most of the retirees we work with hear the word “retirement” and think of their bucket lists – things they want to do, buy, or experience. With so much riding on their retirement funds, it’s not uncommon to find retirees feeling paralyzed as they watch the market, wondering if they’ll have enough money. This again requires a change in thinking: the health of your retirement likely isn’t riding on investment mistakes but rather mistakes in planning.
Let’s say you invest in Chevron instead of Exxon, and Exxon performs better. That’s an investment mistake, and while it may have an impact on your retirement outlook, it’s probably not going to sink you if you invested wisely. Then, a week later, the market crashes or your too-risky portfolio collapses. These are the kind of events that can endanger a retirement, but many retirees don’t preempt them because they haven’t even considered them a possibility. We call these planning mistakes, and they can be avoided – often with the help of a retirement specialist.
So, if you find yourself asking “how much is enough,” or feel paralyzed by your retirement, reach out to Baird Retirement Management. We’ve been helping retirees answer all the big (and small) questions that come with retirement. We’re here to help you.