Retirement is like receiving the grand prize after a challenging and relentless race—a life stage filled with freedom and fulfillment. But determining the right moment to cross that finish line can be ambiguous for most people. And once you reach this milestone, another question arises: How much can you afford to enjoy the life you’ve always imagined?
In the past, there was a common belief in the reliability of a 4% withdrawal rate. This approach involves withdrawing 4% of your retirement savings each year, allowing your funds to last for around 30 years. The general agreement was that if someone needed $120,000 annually for a comfortable retirement, they could aim to save $3 million, which would provide long-term stability using this method.
However, calculating the exact amount of money needed for retirement is far from a straightforward equation; there is no one-size-fits-all formula. Several factors, such as market fluctuations, living expenses, and inflation, can profoundly impact your ability to retire comfortably. Read the following insights from our team to understand the relationship between these three elements and how they can influence your perfect retirement timeline.
The Impact of Market Conditions
When you’re in the accumulation phase of retirement planning, you’re not withdrawing from your accounts just yet; you’re only adding money. During this phase, the sequence of market returns doesn’t matter as much. You can have a mix of good years and bad years over a 10 or 15 year period and your returns will be the same overall because you didn’t withdraw any money during that time.
But when you finally retire and start taking withdrawals, sequence of returns begins to matter. If you experience a few bad years at the beginning of retirement, it could greatly reduce how long your money lasts.
Here’s a chart to show what I mean1:
In this chart, you can see that Portfolio A, B, and C all start with the same $1 million balance, and withdraw the same $60,000 a year adjusted 3% annually for inflation. However, each portfolio experiences a different mix of high and low returns over the years. Portfolio A has positive returns in the beginning and ends up with $1.1 million left in the bank at age 90. On the other hand, Portfolio C has a few negative returns in the beginning and ends up running out of money around age 87.
Depending on your overall expenses in retirement, this math could work out the same way regardless of whether you have a $1 million nest egg or a $5 million nest egg.
The moral of the story? Even if you have a rough idea of how much you need to retire comfortably, you could still run out of money prematurely if you retire in a bear market and don’t have a proper cash flow plan in place. That’s why it’s critical to meet with a financial advisor who can stress test your portfolio and run various what-if scenarios to ensure your retirement assets will last even through the most turbulent of times.
The Impact of Cost of Living
Have you thought about where you’ll live once you retire? Will you stay in your current city or relocate somewhere new and exciting? The cost of living in Portland is about 30.8% higher than the U.S. average and around 18% higher than other cities in Oregon.2 Retire to Honolulu, Hawaii, and your cost of living would be about 77% higher than the U.S. and 46% higher than Portland.
See what I’m getting at here?
Where you choose to live in retirement matters. It plays a major role in how much money you’ll need to live comfortably. That’s not to say you should move to an area with a lower cost of living as soon as you retire—you also need to factor in which location will make you happy and keep you active. But if you choose an area with a higher cost of living, it is important to factor these costs into your retirement planning.
The Impact of Inflation
Inflation is known as the silent killer in retirement because it creeps up on you. You never really see it coming until you look back and realize that loaf of bread that costs $4 used to only cost $0.50.
It’s quite common for retirement to last 20 to 30 years. If we use an average 2% inflation rate each year,3 the $150,000 a year you live on now will be the equivalent of $223,000 in 20 years, and $272,000 in 30 years.4
As you continue to save for retirement, keep in mind that you’re saving for today’s income and expenses as well as your future inflated income and expenses. Be realistic about how much you need to save and talk with a financial advisor about ways you can protect your nest egg from the eroding power of inflation.
Work With a Trusted Partner
At Spring Source Wealth Advisors, we strongly believe that figuring out when you can retire and how much money you’ll need for a comfortable life is unique to each individual. To help you get clear on what that number is, we start by carefully examining your financial situation and specific goals. This analysis allows us to identify the steps you can take today to realize the lifestyle in retirement that feels right for you.
Would you like to partner with a professional committed to helping you succeed? We’re eager to offer guidance to help you determine the retirement timeline that best fits your unique goals. We invite you to set up a meeting today or call (503) 714-9531 or email scott@springsourcewealth.com to get in touch.
About Scott
Scott Abrahamson is Owner and Wealth Advisor at SpringSource Wealth Advisors, a fee-only fiduciary Wealth Advisor with a passion for making the retirement planning process simple. With their goals-based planning approach, SpringSource helps individuals, families, and small businesses make smart financial decisions and realize the core value of their finances: living an abundant life. As an independent CERTIFIED FINANCIAL PLANNER™ professional with over 20 years’ experience, Scott’s mission is to empower clients to reach financial freedom through exceptional, caring service. He takes time to explore each client’s core values about money and partners with them to formulate clear goals based on those values. The result is a powerful, personalized road map designed to help each client successfully navigate every life phase. Scott loves watching clients experience a sense of peace and financial independence through smart financial planning over time.
Outside of the office, he enjoys playing and coaching sports, boating, outdoor activities, spending time with family, and serving in the community. To learn more about Scott, connect with him on LinkedIn.
About Chris
Chris Pawlowski is Wealth Advisor at SpringSource Wealth Advisors, a fee-only fiduciary Wealth Advisor with a passion for making the retirement planning process simple. With their goals-based planning approach, SpringSource helps individuals, families, and small businesses make smart financial decisions and realize the core value of their finances: living an abundant life. Since entering the financial planning industry in early 2013, Chris enjoys understanding his clients’ goals and working hard to formulate effective strategies for them. With the technical experience in the planning industry that puts him in a strong position to help clients through every life stage, Chris desires to empower families to reach financial freedom through exceptional, caring service.
As a Veteran who served in both the U.S. Army and the CA Air National Guard, Chris has a special passion for helping his brothers and sisters at arms in pursuing their financial goals. He holds the CFP®, Chartered Retirement Planning CounselorSM (CRPC®), and Accredited Portfolio Management AdvisorSM (APMA®) designations. Outside of the office, Chris devotes his time to his beautiful wife, Yvette, his church, and his hobbies, which include backpacking, kayaking, hiking, and enjoying time with his family and friends. He also partners with Hope World Wide, a faith-based charity organization in Portland, to serve local families in need. To learn more about Chris, connect with him on LinkedIn.
Information provided herein is provided by SpringSource Wealth Advisors. This information is for general informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Information was compiled from third-party sources believed to be reliable and accurate but cannot be guaranteed. Investment advisory services are offered through Oswego Wealth Advisors, Inc., an SEC Registered Investment Advisor. Neither SpringSource Wealth Advisors, nor Oswego Wealth Advisors, Inc render any legal, accounting, or tax advice. All investments involve risk, are not guaranteed, and may lose value. We recommend that all investors consult with a qualified adviser to assess your personal situation before implementing any strategy.
Please remember to contact your advisor when your financial circumstances or objectives change. Your advisor may recommend adjustments to your financial planning and investment strategies to better suit your current situation.
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1 https://www.blackrock.com/cl/literature/investor-education/sequence-of-returns-one-pager-va-us.pdf
2 https://www.bestplaces.net/cost_of_living/city/oregon/portland
3 https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093