How Much Should I Save If I Want To Spend $100,000 Every Year In Retirement?

The key to achieving a successful retirement is careful, realistic planning. First, you need to decide what the ideal retirement looks like for you and your spouse. Will you travel? Move to an exotic location? Build a mountain cabin? Start a small business? Once you’ve set your goals, you must think carefully about how much income you need to make those dreams come true.

But what if you discover that you need a significant amount of annual income to fund your post-career life? Really significant. Like $100,000 per year? The retirement calculators will say you need to have $2.2 million in your retirement accounts to generate that level income.

Put away that paper bag. Don’t hyperventilate. There are ways to generate that $100,000 of retirement income without eating cat food from now until you turn 65.

Related: 4 Questions To Answer When Planning For A Happy Retirement

Your investments should provide only a portion of your retirement living. Here are some other income streams to consider.

Social Security -- You can start receiving benefits when you are 62, but you’ll get a higher monthly payment for every year you wait up to age 70. But will Social Security be around when you retire? Probably, especially if you are currently in your late 50’s or early 60’s. If you’re just starting your career, it couldn’t hurt to plan for a retirement without Social Security.

Pension – If you are one of the lucky few who still earns a pension – teachers, government workers – remember to factor that income into your monthly income.

Part-time Work – Consider taking on a part-time job to generate some additional income. Your side gig should be on your terms -- work you enjoy with hours that allow you to live out your retirement dreams. The ideal job will connect with one of your passions. If golf is your thing, get a job as a starter or tournament marshal. Love clothes and fashion? Put in a few hours per week at a boutique.

Working part-time offers the secondary benefit of social interaction and the chance to make new friends.

Rental Income – If you are in a position to buy a new home without selling your current house, consider renting the old place. This is a great idea if you plan to downsize in retirement. There are two potential benefits to renting. First, your tenant is paying the freight while you build equity in a home that is hopefully increasing in value. Second, the rent may exceed your monthly obligation on the house – mortgage payment, taxes, upkeep – in which case you are generating extra monthly income.

Related: Have Some Street Sense When Deciding Whether You Should Sell Or Rent Out Your House

Investment Income – This is a central piece of the income puzzle. A generally accepted rule of thumb says every $250,000 you save will throw off $1,000 per month in income. This money comes from dividends on stocks, interest on bonds and distributions from such alternative investments as REIT’s (Real Estate Investment Trusts) or MLPs (Master Limited Partnerships).

Obviously, the sooner you start saving, the faster you’ll reach your goals, thanks to the power of compounding, in which interest thrown off by an asset is reinvested and thus earns more interest. As the great showman P.T. Barnum noted, “A penny here, and a dollar there, placed at interest, goes on accumulating, and in this way the desired result is attained.”

Related: It's Not How Long You Save, It's How Early You Start

So, let’s put all of this together to see exactly what it will take to get you and your spouse to that $100,000 annual income:

Social Security = $3,000 per month ($1,500 each) Part-time Pay = $1,000 per month ($500 from each of your jobs) Pension = $0 Rental Income = $1,000 per month (after all expenses)

TOTAL = $5,000 per month

The above gives you $60,000 in annual income, meaning you need to generate $40,000 additional per year from investments. It takes about $850,000 in retirement savings to throw off that amount of income. That’s doable for most anyone with a bit of discipline and determination – especially if you start early.

As the chart below shows, you can amass $850,000 in 35 years by setting aside just $636 per month. But wait just 10 years to start and you need to save $1,291 per month – more than double.

True, $850,000 is a lot of money, but it’s worth every sacrifice if it funds the retirement that you fantasize about while driving home from work. And, heck – it’s a bargain next to the $2.2 million that damn calculator said you’d need to make your dreams come true.

Years Until Retirement

15

20

25

30

35

Monthly Savings

$3,043

$1,926

$1,291

$896

$636

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Screw Pensions, Here's Why You'll Be Just Fine Without It

Learn More About How Wela Can Help You Grow Your Wealth Here

Do you ever get tired of your dad telling you how it was better back in the day? Nobody locked their door, kids wore their ball caps with the bill in front, and if you worked hard and stuck with your employer, you got a retirement party, gold watch and a pension.

He’s got a point about that last one.

For much of modern history, many retirees counted on an employee pension to fund their golden years. This life-long monthly reward for years of devoted service was so central to retirement that the British refer to post-career people as “pensioners” and here in the U.S. employs who were eased out of a job a bit early were said to be “pensioned off.”

No more. Private sector pensions have been going out of style since the 1980’s as companies seek ever-greater cost efficiencies. Just one-third of American retirees currently receive a pension, and that figure includes those who worked in the public sector, where pensions are still fairly common. The median private sector pension benefit in 2014 was $9,200 per year. Those vanished pensions have been replaced, in most cases, by an employer-sponsored 401k tax-deferred savings plan, often with the company matching a percentage of employee contributions.

Sucks, right? Well, kinda. Your dad was spot-on about the awesomeness of pensions. They do provide a great sense of stability and security in retirement. Some retirees live an enjoyable retirement on pretty much just their pension and Social Security benefits.

Related: How Much Should I Save If I Want To Spend $100,000 Every Year In Retirement

But don’t get all sad. There are some real advantages to having a 401k instead of a pension.

Job flexibility. You typically need at least 10 years service with an employer to earn pension benefits. This requirement can really limit your career options. Imagine that after nine years with Oscorp, which has a great pension plan, you are offered a dream job at Stark Industries. If you take the new job, your time at Oscorp will net you nothing in retirement. But if you have a 401k at Oscorp, you own the contents of that account and can roll them over to Stark’s even-better 401k plan with no hassle or consequence.

Tax benefits. Those like-clockwork pension payments are fully taxable as soon as they hit your account, so you incur a tax liability every month, whether or not you needed the money at that point. With a 401k, your money is taxed only when it’s withdrawn from the account. If you don’t need to tap the 401K this month, you have no tax obligation.

What’s more, your annual contribution to a 401K is deducted from that year’s taxable income, reducing the government’s bite of your money apple.

Emergency access. You can borrow from your 401k savings if necessary. While never a great idea, this option isn’t available from a pension.

Leftovers for family. Any money left in your 401k at the end of your life goes to your heirs. Pension payments end at your death, or, in some cases, the death of your spouse.

Don’t spend a minute pining for the good old days of pensions. You can generate the same level of retirement income, and have more control over your money by building your own retirement strategy consisting of various income streams, including Social Security, the proceeds from your full-funded 401k, additional savings, and such ancillary money as income from rental property and even a part-time retirement job.

Related: Why Investing In Your 401k Is A No-Brainer

Like all DIY projects, forging your own retirement future takes time and effort, but pays off in the satisfaction of creating something that exactly meets your needs on your terms.

How to Build your investment portfolio to meet your retirement needs

There are any number of core investment philosophies, each with it own merits and uses. How do you decide which strategy or philosophy works best for you?

At Wela, we believe both growth and income investing have important roles to play in a successful retirement portfolio. During the front part of your wealth-building years, we recommend a growth strategy in which you invest heavily in stocks that will gain in value over the years (and decades), allowing you to reap significant profits when you cash out.

But as you near retirement we believe in transitioning to an income-driven portfolio consisting largely of assets that generate a steady cash flow that can provide you with a “paycheck” in retirement. That income comes from stock dividends, bond interest and income from alternative investments, such as preferred stocks, real estate investment trusts (REITS) and royalties from energy trusts.

One thing I love about income investing is that a well-crafted income portfolio can meet your retirement spending needs for years while limiting the drain on your capital.

 

Working Years: To understand the benefit of income investing, it might help to think of your retirement portfolio as a house. During your working years, you build your portfolio brick-by-brick -- dollar-by-dollar, asset-by-asset. It begins as a starter home -- functional but not fancy. Over time, you add rooms and amenities; a second floor, basement media room and a deck. With luck, the house appreciates over the decades until it’s worth, say, a million dollars.

Retirement: Now it’s time to retire. How do you get your money out of the house? Well, if it’s a growth “house,” you sell it off piece-by-piece and use the proceeds to fund your retirement. When the last piece is sold, the money is gone.

But if it’s an income house, it generates “rent” in the form of that asset income from stocks, bonds and other investments. That income, previously reinvested while you were “building the house” can now be used to cover your expenses. You may well have to sell some parts of the house over the years, but at a slower rate than the owner of a growth “house.”

How much slower? Well, imagine you have a portfolio at retirement worth $500,000 that can generate $20,000 in annual income. Assuming you can live on that money (plus Social Security, pensions, et cetera) after 10 years you would have derived $200,000 from your portfolio but it would still be worth about $500,000, depending on how the market moves.

In order to derive the benefits of both growth and income investing, we recommend the “bucket” approach to creating an effective retirement investment portfolio. As the name suggests, your investments will fall into one of three categories or “buckets.”

Bonds – Contributions to this bucket are invested in a diversified range of bonds – Treasury municipal and corporate – that will provide a steady stream of interest income while protecting your principal. To maximize your return over time you will need to diversify these holdings.

Your portfolio should hold a greater percentage of bonds (as opposed to stocks), as you get closer to retirement. We recommend “owning your age” in bonds. When you are in your 30’s, bonds should make up 30% of your portfolio. When you are 50, that percentage should be 50%.

Stocks – This is where growth comes into play. During your working career this bucket will contain mostly shares in companies that have large growth rates, but don’t pay much of a dividend. Think Netflix or Amazon. Ideally, these stocks will significantly appreciate in value over the years. When you retire, you will shift your holdings into income stocks – shares that show some growth but pay a nice dividend. Apple and Disney are good examples. There are several excellent growth ETFs that allow you to tap into the appreciation of a whole basket of companies.

Alternative Income – This smallest bucket holds income-generating assets that are neither stocks nor bonds. This includes real estate investment trusts, preferred stocks and shares in pipeline and energy storage companies. All of these assets are traded on open markets like stocks and bonds.

While income investing isn’t the only way to saving for the future, in our experience it’s a way to have your “house” provide safety and warmth during your retirement years.

Interested in learning more about investing? Read how an average family retired with 1 million dollars in savings. Download our free eBook on investing here

Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. 

Social Security Changes As Of November 6, 2015

This letter was originally sent to Wela users and Wela Strategies clients on Tuesday, December 8, 2015.  There are changes coming to Social Security Benefits* and in the following note I wanted to give you the main highlights, who may be impacted, and how the changes may relate to your overall financial planning.

*As of November 2nd, 2015, President Obama signed, and thereby enacted into law, the Bipartisan Budget Act of 2015. Subtitle C, Section 831 of this bill includes significant changes to social security benefits. These changes include the phase out of filing strategies referred to as “unintended loopholes” created previously by Congress back in 2000.

Before you start worrying about being personally impacted let me share with you who will NOT be impacted:

Anyone who is age 70 and up and is already receiving social security benefits. This group should see no change as a result of this new law.

Anyone who is between age 66 and 69 (and suspends their benefit) by May 2, 2016, will be “grandfathered in” and can still utilize the retroactive lump sum option. If you were not planning on taking a lump sum then these new legislative changes will not impact you.

Anyone who is between age 66 and 69 (and suspends their benefit) by May 2, 2016, can still have the option to suspend their benefit and allow it to grow, while at the same time their spouse can file a restricted application at full retirement age (which allows them to collect spousal benefits only).

Anyone who is age 62 (by December 31st, 2015) will still have the option to file a restricted application (filing for a spousal benefit only) when they reach full retirement age (66) as long as either: (1) your spouse “filed and suspended” their benefit prior to May 2, 2016 or (2) your spouse is already receiving their lifetime benefit (anytime between 62-70).

If you do not turn age 62 by the end of 2015 these new social security rules will apply to you. The ability for your spouse to file a restricted application (filing and collecting a spousal benefit only) if you choose to suspend your benefit will not be available. In other words, your spouse cannot collect their “spousal benefit” unless you are collecting your benefit.

From our understanding of the new provisions, once you reach your full retirement age, the option to collect a retroactive lump sum will not be available to you.  This applies to anyone who has still not reached age 66 by May 2, 2016.

Of course, the Social Security Administration has the final say when it comes to interpreting this statute. Just remember when you do file you should:

  • Do it in person
  • Arm yourself with information

If you feel like the SSA representative you are talking to doesn’t understand the rules, keep moving up the chain until you find someone who does.

We will continue to watch this situation and keep you up to date on the latest developments as the Social Security Administration implements these new statutes.