How much retirement income do you really need each month?
Retirement planning usually starts with a big question: “How much money do I need to retire?”
But there’s another question that may matter even more: “How much income will I actually need every month?”
Having $1 million, $2 million or more saved doesn't automatically tell you whether you'll have enough money to pay the bills, travel, enjoy your hobbies and handle the unexpected.
Your retirement income needs depend on how you want to live, what you spend, healthcare and long-term care costs, taxes, inflation and how much income you'll already receive from sources like Social Security or a pension.
You don't need to predict every expense down to the penny. But having a realistic estimate of your monthly retirement income can help make the bigger picture much clearer.
How much retirement income do I need?
There isn't one magic number that works for everyone.
Someone planning to travel extensively may need considerably more retirement income than someone planning a quieter lifestyle.
A good place to start is with what you spend today. Break your expenses into three categories:
Essential: Housing, utilities, groceries, insurance, transportation, healthcare and other bills you need to cover.
Discretionary: Travel, dining, hobbies, entertainment, gifts and other things you want to enjoy.
Unexpected: Home repairs, replacing a vehicle, helping family members or other expenses that don't show up every month.
This is often more useful than simply assuming you'll need a certain percentage of your pre-retirement income.
Retirement account balance vs. retirement income
Your retirement account balance and your retirement income are two very different things.
Having $1 million saved doesn't automatically mean you'll have a specific amount of monthly income. What you can actually spend typically depends on:
How much you've saved
Investment performance
Withdrawal rate
Inflation
Taxes
Market volatility
How long your money needs to last
Other income sources
That's why retirement income planning usually needs to answer two questions:
How much will I need to spend?
and
Where will that income come from?
The first gives you a target. The second helps determine how your assets and other income sources can potentially support it.
Don't forget taxes and healthcare
It's easy to look at a retirement income estimate and forget that some of that money may go toward taxes.
If you need $6,000 a month to cover your expenses, you may need more than $6,000 in gross income depending on where that money comes from.
Retirement income could come from:
Traditional IRAs and 401(k)s
Roth IRAs
Taxable investment accounts
Social Security
Pensions
Annuities
Other sources
These sources don't necessarily receive the same tax treatment, so $6,000 of income isn't always $6,000 of spendable money.
Healthcare and long-term care are other major variables. Retirement healthcare expenses can include Medicare premiums, supplemental coverage, prescriptions, dental and vision care, deductibles, out-of-pocket costs and potentially long-term care.
And those expenses may change unexpectedly and quickly as you get older.
Don't underestimate inflation
Retirement could last 20, 30 or more years. The cost of living probably won't stay where it is today.
If your lifestyle costs $5,000 a month today, it could cost considerably more years from now.
Inflation can affect everything from groceries and utilities to travel, housing and healthcare. That's why how much income you need in retirement shouldn't be based only on your first year of expenses.
Social security is part of the picture
For many retirees, Social Security provides an important base of predictable income. But it may not cover everything.
One simple way to look at the retirement income equation is:
Retirement expenses − predictable income = potential income gap
Predictable income might include:
Social Security
Pension income
Certain annuity income
Other contractual income
For some households, the gap may be relatively small. For others, it could be several thousand dollars a month.
That gap is where retirement assets and other income sources often come into play.
Income you can count on vs. income that moves with the market
One of the most important distinctions in retirement is the difference between predictable income and flexible income.
Income you can count on
Some income sources are designed to provide payments regardless of short-term market performance. These may include Social Security, pensions and certain annuity income.
This type of income can help provide a foundation for expenses that have to be paid every month.
Income that depends on the market
Stocks, bonds, mutual funds and ETFs can provide growth potential and flexibility, but their values can fluctuate.
That usually creates a different kind of risk in retirement. When you're working, a market downturn may give you years to recover while you're still earning and contributing. In retirement, taking withdrawals while your portfolio is falling can have a bigger impact on how long those assets last.
That's why retirement income planning isn't just about how much money you have. It's also about where your income comes from and how dependable it is.
How much monthly retirement income do you need from investments?
Once you estimate your expenses and predictable income, you can look at the potential gap.
For example, imagine you expect to spend $7,000 a month in retirement. If Social Security and other predictable income provide $4,500, you have a potential $2,500 monthly income gap.
That gap could potentially be addressed through:
Investment portfolio withdrawals
Additional predictable income
Cash reserves
Other income sources
Part-time work
Adjustments to discretionary spending
There isn't necessarily one answer. The important thing is knowing what the gap looks like so you understand what your retirement income plan needs to accomplish.
Can a retirement income calculator help?
A retirement income calculator can be a useful starting point. Many calculators allow you to enter current savings, expected retirement age, monthly spending, investment returns, inflation and Social Security.
Just remember that the results depend heavily on the assumptions you enter.
Change the expected investment return, inflation rate, retirement age or spending level, and the result can change dramatically.
A calculator can help you run scenarios. It can't predict exactly what your retirement will look like.
Your retirement income needs may change over time
Your spending at 65 may not look anything like your spending at 80.
Early retirement may bring more travel, dining, hobbies and other activities. Later, spending may shift as your lifestyle changes, while healthcare and long-term care expenses could become more significant.
The takeaway is simple:
Your retirement income needs aren't necessarily fixed.
Your plan needs enough flexibility to account for changes along the way.
What if your retirement income isn't enough?
If projected income doesn't cover projected expenses, finding that out early gives you more options.
Depending on your situation, those could include:
Saving more
Working longer
Spending less
Delaying retirement
Adjusting discretionary expenses
Changing when Social Security begins
Using assets differently
Creating additional predictable income
The key is identifying a potential shortfall while there is still time to address it.
Build the income plan before choosing the products
Once you have a clearer idea of how much income you may need, the next question is:
How will you create it?
Start with the income you need. Then look at which expenses need predictable income and which can be supported by more flexible assets.
An annuity may provide predictable income. Investments may provide growth and flexibility. Cash may provide liquidity. Social Security and pensions may provide additional income you can count on.
The products typically come after the plan.
The bottom line: How much retirement income do you really need?
So, how much retirement income do you need each month?
Start with your real life, not an arbitrary rule.
Look at what you spend today. Separate essential expenses from the things you want to enjoy. Add healthcare, taxes, inflation and the expenses that don't show up every month.
Then look at how much income you can expect from Social Security, pensions and other predictable sources.
What's left is your potential income gap.
That gives you a much more useful starting point than simply asking whether you've saved “enough.”
The bigger question becomes:
How can your retirement assets provide the income you need while giving you enough flexibility to handle everything else retirement may bring?
That's the foundation of a retirement income plan.
Wondering how much income you’ll need in retirement? Contact us and we'll connect you to a licensed financial professional who can provide a complimentary retirement income analysis.
For informational and educational purposes. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such.
