Aaron Rheaume column: No certain answers to the retirement money question

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“How much do I need to retire?”

Imagine for a moment that your working career is coming to an end and retirement is on the horizon. What does that look like for you? Are you going to travel to exotic destinations, live in a golf course community, spend more time with the grandkids, volunteer in areas you are passionate about, or live out your bucket list items?

Ironically, yourlifeafterwork.com is our company’s web address, and we help many people plan for their life after work.

One of the most common questions that we are often asked at the Financial Enhancement Group when it pertains to nearing retirement is: “How much money am I going to need to be able to retire?” That is a great question and asked by most everyone. Unfortunately, there is not a one-size-fits-all answer to the question. Everyone’s situation is different and unique.

There are some common themes that we look at to help our families get to their destination. One of the themes is getting folks to focus on replacing their standard of living and not the income they are accustomed to making.

For example, it may take a family $4,000 a month to cover their living expenses and lifestyle, and their current income is $6,000 a month. The focus is not on replacing the $6,000 a month in income they are making. In retirement, the plan is to replace the $4,000 a month that covers their living expenses and lifestyle.

Replacing someone’s standard of living can be done in quite a few ways. First, we need to look at what type of fixed income will be coming in from pensions, social security, rental income, annuities, etc. For some, their fixed income will cover their entire standard of living, and for others, we must find ways to supplement their income through drawing down their investments.

History has long suggested a standard 4% withdrawal rate from the portfolio that can increase with inflation. However, history did not involve a period with low dividend yields (modestly high valuations) and low interest rates.

In past stock market downturns, bond returns have been there to keep a balanced portfolio afloat. We currently encourage a 3.2% to 3.8% withdrawal rate, depending on the client’s mindset. That means that if you built your retirement nest egg to a $1,000,000, you could withdraw approximately $32,000 to 38,000 a year to help supplement your income.

Once we figure out where income will come from to replace standard of living, the next factor is making sure that it is done in a tax-efficient way. Tax efficiency is a critical component in retirement planning that many folks do not think about that can lead to future financial frustrations.

There are many different things to consider when planning for your retirement journey. If you have not done so, I would encourage you to employ the help of a qualified financial planner that works for a fee rather than sells products as answers. They will help guide you in making the correct retirement decisions, so you can enjoy your life after work.