Over the last 25 years one of the most common questions I have received from clients is, “how much can I spend and not run out of money?” In my experience, many investors don’t know what a sustainable spending strategy looks like. Today’s article will be focused on showing what a 60-year-old couple with $2 million dollars might expect for retirement income.
To keep it simple, we will review the potential income the couple has built, in today’s dollars. No forecasts or projections or inflation adjustments. Just a straightforward analysis of the income a 60-year-old couple with $2 million dollars has built, thus far.
I find that people can best relate to today’s prices. Knowing how much income you have currently built is a good baseline for retirement planning. You can use this baseline to see how you feel about your potential retirement income. If you don’t feel good about your baseline, then you need to save more and grow your portfolio more. On the other hand, if you feel good about your baseline relative to your budget, then you are on track for a smooth retirement!
To quickly determine how much income a 60-year-old couple with $2 million has built, we need to calculate their expected social security at full retirement age, in today’s dollars and add the social security to their portfolio distribution. The total of their social security and their portfolio distribution is their pre-tax max spending.
$2 million Portfolio Income Example
In the example above, we are using an estimated $72,000 household social security for our hypothetical 60-year-old-couple. In addition to the social security benefits, we see three options for spending strategies; conservative, moderate and aggressive. I like to classify a retirement plan as one of the three. I think it is a good idea for near retirees to decide how much risk they want to attach to their retirement spending strategy. Not all planners do this but I think it is a good exercise.
If you want a no stress retirement with the potential to grow your portfolio in retirement, then you would choose the conservative retirement distribution of 3%. This spending strategy is very low risk and gives you the best chance at growing your wealth in retirement. If you want to use a moderate level of risk for your spending strategy, then you can spend 4% of your portfolio. Spending 4% is generally considered safe for retirees if you have a diversified portfolio. You could run out of money when spending 4% but the odds are low. When spending 4% of your portfolio in retirement, you may die with less money than you started retirement with. For retirees who spend 5% of their portfolio in retirement, the odds of running out of money go up, especially if you increase your spending for inflation every year.
Analyzing the table above we can see that for a 60-year-old couple with $2 million and $72k of planned social security benefits, they have built a $132k – $172k income stream thus far.
Ethan S. Braid, CFA
President
HighPass Asset Management
Denver, CO