My wife and I are both 65 years old. She is retiring this year and I will continue working until I am 67. We get about $42,000 in Social Security and have about $1 million in savings. Can we live on €90,000 a year?
-Terry
$90,000 a year will push the upper limit of what I would be comfortable with as a general rule. However, whether it will work for you is highly individual. Let me give you an overview of some of the things you’ll want to look at before deciding if you’re comfortable spending $90,000 a year. (And if you need more help planning for retirement, consider working with a financial advisor.)
Does your expense number include taxes?
Will the $90,000 you expect to spend each year cover your annual tax bill, or is that the amount you want to spend after taxes? The answer to this question is crucial. If the latter is the case, you’ll have to withdraw even more of your savings each year, further stressing the longevity of your portfolio.
Whether your savings are held in a tax-deferred, Roth, or taxable account matters. I’m assuming your money is mostly deferred, meaning it’s held in 401(k)s and IRAs. You’ll need to consider the income tax you’ll owe when you start withdrawing that money. If a significant portion of your assets are in Roth accounts, your distributions will be tax-free, which will simply be the process. (And if you want more help managing your retirement savings, consider consulting a financial advisor.)
What is your investment plan and risk tolerance?
You should invest according to your own risk tolerance. But if your portfolio is too conservative or aggressive, it will put additional pressure on your savings.
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If you and your wife are particularly conservative, this will likely hinder your ability to keep up that level of spending over time.
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If you’re too aggressive, you could expose yourself to too much volatility, which can also devastate a retiree’s portfolio once withdrawals begin.
The 60/40 portfolio has traditionally been so popular with retirees because it gives them enough equity to take advantage of the long-term growth often necessary for a decades-long retirement without too much volatility. It’s not for everyone, but the point is, if your entire balance is in CDs, for example, your money probably won’t grow fast enough. The opposite is true for a 100% equity portfolio. It’s too volatile and one or two bad market years, especially early on, could be catastrophic. (A financial advisor can help you find the right mix of stocks, bonds and other investments for your risk tolerance.)
What is your withdrawal rate?
A lot of retirement income planning focuses on your withdrawal rate. The classic “rule of thumb” is that if you withdraw 4% of your savings in the first year of retirement and adjust subsequent withdrawals for inflation, you can be reasonably confident that your money will last thirty years. I use that term loosely. It’s not a hard and fast rule, but more of a guideline for understanding safe withdrawal rates in a historical context. Most people would have to adjust it somehow. For example, you may not want or need to plan for your money to last 30 years.
Again, depending on what that $90,000 fee entails, I think you could easily be looking at a withdrawal rate in the neighborhood of 5% and possibly even higher. This doesn’t necessarily have to be a showstopper. However, you should take some time to understand how your withdrawal rate affects your ability to maintain your spending without depleting your savings too quickly. (And if you need help determining an appropriate withdrawal rate, this tool can help match you with a financial advisor.)
In short
Whether your savings and Social Security benefits can cover $90,000 in annual expenses depends on a number of factors. You’ll want to consider whether you need $90,000 before or after taxes and think about both your investment mix and your risk tolerance. You’ll also want to figure out what kind of withdrawal rate you need to meet your spending needs in retirement.
Tips for finding a financial advisor
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Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Consider a few advisors before choosing one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and has received compensation for this article.
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