0:00

Today I'm going to show you the three very

0:02

simple steps that you can take to know exactly

0:04

how much you need in your portfolio to retire.

0:06

Now even if you've gone through a very comprehensive

0:08

process to determine that number for yourself, this is

0:11

still a great process to go through just to

0:13

gut check what you've done and make sure that

0:15

you're looking at things from all angles. So I'm

0:17

going to walk you through these three very simple

0:20

steps and then at the end I'm also going

0:22

to walk you through some nuances to this that

0:24

could change things a bit. So stay tuned for

0:26

both the core process to go through as well

0:28

some of the things that could potentially changes

0:31

or derail this if you're derail this

0:33

if you're not careful. I'm your host James

0:35

Kanole and I'm here to teach you how

0:37

to get the most of life with your

0:39

money. And now on to the episode. The

0:41

first thing that you need to do

0:43

when determining how much money do

0:45

you need in your portfolio to

0:47

retire is you need to determine

0:49

your retirement expenses. Now before we

0:51

talk about what your retirement expenses

0:53

are, let's first talk about what they

0:55

are not. A lot of people fall into

0:57

the trap of thinking what I'm earning today,

1:00

that is the expenses that I'm going to

1:02

have in retirement. What you're earning today, you

1:04

have a lot of deductions, you have a lot

1:06

of taxes, you maybe have a lot of expenses

1:08

that aren't actually going to be there when you

1:11

retire. Let's use an example. Let's assume that

1:13

you are earning $100,000 today and you're trying

1:15

to figure out how much money do you

1:17

need in your portfolio to retire. Well, start

1:19

with $100,000, but don't use that as your

1:21

retirement expenses. Even if you want your lifestyle

1:23

to stay the same, there are some things

1:25

that are going to change. For example, On

1:27

that $100,000 you are paying payroll taxes.

1:29

Payroll taxes are also called FICA taxes.

1:31

This is what's used to fund Social

1:34

Security and Medicare, and that is 7.65%

1:36

of every dollar that you earn up

1:38

to a certain cap that is going

1:40

to pay that tax. So in $100,000

1:42

of income, that's $7,650 of expenses that

1:44

will no longer be there for you

1:46

when you're retired. So that's something that

1:48

we can back out. Let's also assume

1:50

that maybe you're saving to a

1:52

401k. And that's how you're preparing

1:54

to retire. Maybe you're saving 10%

1:56

per year of your annual salary

1:59

to that 401k. Well, when you retire,

2:01

you're no longer saving to your 401k,

2:03

so 10% of $100,000, that's another $10,000

2:05

that will no longer be there when

2:07

you're not working anymore. Next, what if

2:10

you have a mortgage? Maybe you're paying

2:12

money into a mortgage payment, and that

2:14

payment is going to be gone by

2:16

the time that you retire. So you're

2:18

not going to a mortgage payment, and

2:21

that payment is going to be gone

2:23

by the time that you're working years.

2:25

So let's quickly tie all this together

2:27

so that you can see how your

2:29

actual retirement expenses might be very different

2:31

than your expenses in your working years

2:34

so you can start to see how

2:36

this is going to be different for

2:38

you. So if you start with $100,000

2:40

as we did in this example, back

2:42

out $10,000 for 401k contributions. You no

2:45

longer need to do that when you're

2:47

retired. Now you're down to only needing

2:49

$90,000. Next, back out the payroll taxes.

2:51

Again, that $7, $6,650, 650 dollars on

2:53

$100,000 of salary. Now let's make some

2:56

assumptions about taxes. Let's assume that this

2:58

individual is filing taxes single and they

3:00

are using their standard deduction, which for

3:02

2025 is $15,000. They would end up

3:04

paying about $11,400 in federal taxes before

3:07

we include state taxes, but I'm going

3:09

to leave that out because that's going

3:11

to be different depending on what state

3:13

you're in. And again, what we're trying

3:15

to do here is we're trying to

3:18

say for this individual that's earning $100,000

3:20

in their working years. What are they

3:22

actually spending after taxes are taken out,

3:24

after 401k contributions are taken out, after

3:26

mortgages taken out, so we can see

3:29

what number needs to be replaced in

3:31

their retirement years? So if we back

3:33

out that roughly $11,400 in assumed federal

3:35

income taxes for this individual, now they're

3:37

closer to about $71,000 of expenses that

3:40

they have. Next, let's assume that their

3:42

mortgage is paid off, and let's assume

3:44

that they're paying $1, $1,500 taxes remain.

3:46

Homeowners insurance remains, but let's assume that

3:48

that $1,500 payment was going towards principal

3:51

interest. Well, if you move that amount,

3:53

$18,000 per year, or $1,500, per month

3:55

from $71,000, what you actually end up

3:57

with is $53,000. So what are we

3:59

done there? Just a title together. What

4:01

we've done is we said for this

4:04

individual who's trying to figure out how

4:06

much money do I need in my

4:08

portfolio to be able to retire, we

4:10

are starting by asking them how much

4:12

do you have in expenses. And their

4:15

expenses are not their income, which is

4:17

$100,000, which is $100,000, $53,000. Now of

4:19

course just because your retire doesn't necessarily

4:21

mean you're not going to pay anything

4:23

in taxes. For the most part there's

4:26

probably going to be some taxes. But

4:28

just to use an example here, if

4:30

this individual who now needs to replace

4:32

$53,000 of income, if they have $28,000

4:34

per year from Social Security, so a

4:37

little bit more than $2,000 per month,

4:39

if they take $10,000 from their traditional

4:41

IRA and $15,000 from their Roth IRA,

4:43

that is a total of $53, and

4:45

they would be in a 0% federal

4:48

income tax tax bracket. That's due to

4:50

what's called provisional income with Social Security

4:52

to determine how much that is taxable.

4:54

Plus, obviously, the Roth IRA is not

4:56

taxed, and then they have the IRA

4:59

distributions, but that would fall under the

5:01

standard distribution amount or the standard deduction

5:03

amount. Such as a very basic example

5:05

to illustrate the fact that once you

5:07

have that $53,000 or once we have

5:10

your expenses, your actual taxes and retirement

5:12

are probably going to be far less

5:14

in many cases than they were in

5:16

your working years. So that step one

5:18

is really determine how much are your

5:21

expenses going to be in retirement. There's

5:23

two ways to do this. There's what

5:25

I'll call a top-down approach, and that's

5:27

what we just did. Start with a

5:29

top-level number that you have today. What

5:31

is your income today? Just your gross

5:34

salary. Before any deductions, taxes, etc. Then

5:36

from there, start pairing off the things

5:38

that will go away in retirement. Is

5:40

that payroll taxes? Is that a lessening

5:42

of your federal tax bill, of your

5:45

federal tax bill, of your state tax

5:47

bill? that will no longer be there.

5:49

Then of course we want to add

5:51

back things in that will be there.

5:53

Are you going to take more trips?

5:56

Are you going to do... more things

5:58

that cost money that you're not doing

6:00

today. So it's simply starting with your

6:02

top level number today, removing what's going

6:04

to go away, and adding back in

6:07

what's going to be there in retirement

6:09

that isn't necessarily there today. That's a

6:11

top down approach. It's going to be

6:13

very simple. You can probably do that

6:15

in just a matter of a few

6:18

minutes, and it's for the most part

6:20

going to be approximately correct. A more

6:22

detailed way, but a much more intensive

6:24

and involved way, is the bottom up

6:26

approach. groceries, utilities, your gas bill, your

6:29

travel, all these things add them up

6:31

line by line to see not every

6:33

single transaction, but every single category, what

6:35

do you estimate you're going to spend

6:37

and you total those numbers up to

6:40

get to the number that you think

6:42

you're going to spend in retirement. I

6:44

recommend both because I see people doing

6:46

the bottom-up approach. And what tends to

6:48

happen is they miss a lot of

6:50

things. They say, okay, yeah, I'm going

6:53

to retire. I might spend $4,000 per

6:55

month in retirement because they add up

6:57

what they can think of off the

6:59

top of their head. But then I

7:01

say, what is your income today? And

7:03

I might be taking home $15,000 a

7:06

month in income today. And I'll say,

7:08

well, that $15,000 per month of income

7:10

today, how did you get to that

7:12

$4,000? And obviously there's a humongous gap

7:14

between those two. I was just thinking

7:16

of what I could remember top of

7:18

mind. So the top down approach also

7:20

helps you to come at this from

7:22

different angles, but the bottom line is

7:24

step number one to determine how much

7:26

do you need in your retirement portfolio

7:28

to retire is determine what expenses will

7:31

you have. Step number two is to

7:33

determine what will your non-portfolio income sources

7:35

be in retirement. So once you know

7:37

how much you want to spend, what

7:39

you have to realize is that the

7:41

role your portfolio is going to create

7:43

the income to help you spend that

7:45

amount. but not usually the entire amount,

7:47

because you'll usually have the help of

7:49

things like Social Security or pension or

7:51

things of that nature that are covering

7:53

a portion of your retirement expenses. Let's

7:55

use a really simple example. Let's assume

7:58

that you want to spend $60,000 per

8:00

year in retirement. Let's also assume that

8:02

you have $25,000 per year coming in

8:04

from Social Security. What does that mean?

8:06

It means that gap, that gap of

8:08

$35,000, that's what we really want to

8:10

hone in on. So as you're looking

8:12

at your plan, start with your expenses,

8:14

which is step one, that's the most

8:16

involved of all these steps. That's probably

8:18

the most time consuming of all these

8:20

steps, is just to get that number

8:23

right, and it's the most important of

8:25

all these steps. Then back out any

8:27

income sources you will have. Anuities, Social

8:29

Security, things that are going to be

8:31

coming into your bank account automatically without

8:33

requiring you to draw down your savings

8:35

or your investment portfolio. Add those things

8:37

up and find the difference. In this

8:39

example, 60,000 of expenses minus $25,000 of

8:41

non-portfolio income sources. In this case, Social

8:43

Security, the gap is 35,000. Now we

8:45

can go to step three. Step 3

8:47

says apply a withdrawal rate to that

8:50

number to determine what does the big

8:52

picture portfolio need to look like to

8:54

create that level of income, not just

8:56

year one of retirement or year two

8:58

of retirement, but every single year throughout

9:00

retirement. A common rule of thumb is

9:02

called the 4% rule. Now I think

9:04

there are other ways to do this,

9:06

maybe even better ways to do this

9:08

in many cases, but the 4% rule

9:10

is a very widely known, well-known rule

9:12

that says if you have a portfolio

9:15

and if it's invested the right way,

9:17

you can be reasonably assured that that

9:19

portfolio is going to last for at

9:21

least 30 years if you just take

9:23

4% per year from that portfolio. So

9:25

let's look at that. What that's telling

9:27

us is $35, $35,000 per year in

9:29

the example that we're using that needs

9:31

to represent 4% of the bigger portfolio

9:33

value. So we're going to take $35,000,

9:35

we're going to divide it by 4%,

9:37

and that's going to give us $875,000.

9:39

In other words, if this individual had

9:42

$875,000, they could take a 4% withdrawal

9:44

rate, which would be $35,000, they could

9:46

use that $35,000, added to their Social

9:48

Security of $25,000, and get the full

9:50

$60,000 per- that they want to live

9:52

on. The nice thing about the 4%

9:54

rule is it's assuming you're going to

9:56

increase your withdrawal for inflation over time.

9:58

So it's not saying you can only

10:00

take out $35,000 and never increase it,

10:02

it's assuming cost living adjustments to keep

10:04

up with inflation over the duration of

10:07

your retirement. Now the 4% rule is

10:09

not a hard and fast rule. Generally

10:11

speaking, I'll see a lot of people

10:13

use somewhere between 4% and 5.5% as

10:15

the withdrawal rate they're going to use.

10:17

if you were using the 5.5% withdrawal

10:19

rate. And by the way, you can't

10:21

just use something and assume that it's

10:23

going to work. You need to be

10:25

invested the right way. You need to

10:27

know what rules to follow. You need

10:29

to understand how this fits in the

10:31

proper context of what type of market

10:34

environment can this support, and when might

10:36

you need to make it, and the

10:38

proper context of what type of market

10:40

environment can this support, and when might

10:42

you need to make it. That's not

10:44

going to be sustainable. That's not going

10:46

to last for the rest of your

10:48

retirement. But do some research. Understand what

10:50

withdrawal is best for you and the

10:52

way your portfolio is invested and how

10:54

long you need it to last for

10:56

so that you can apply that to

10:59

your withdrawal need and get a portfolio

11:01

value. So those are the three steps.

11:03

Fairly simple. What are your retirement expenses?

11:05

How much of those expenses will be

11:07

covered by non-portfolio income? and how big

11:09

of a portfolio do you need to

11:11

fill in the difference? Now I mentioned

11:13

there's some nuances. I mentioned there's some

11:15

details here. Yes, this is very simple,

11:17

and this is going to get you

11:19

most of the way there. But keep

11:21

in mind there are some things that

11:23

will change us, and I want to

11:26

go through a quick list of what

11:28

that will be. First is consider uneven

11:30

income sources. This all makes sense if

11:32

you're assuming that Social Security starts right

11:34

when you retire at 60, and maybe

11:36

doesn't collect Social Security until age 70.

11:38

where your portfolio is going to need

11:40

to do a lot more heavy lifting

11:42

up front and then maybe less heavy

11:44

lifting on the backside from 70 and

11:46

beyond where more income is coming in

11:48

from Social Security which lessens the pressure

11:51

on your portfolio. So be mindful of

11:53

that. How do you adjust your withdrawal

11:55

rates? You're not just going to take

11:57

a standard 4%... every single year and

11:59

have a giant pay bump at age

12:01

70 because that's when Social Security comes

12:03

in you're probably going to take more

12:05

potentially in the first few years and

12:07

a lot less in the last few

12:09

years so how do you balance that

12:11

out so that's accounting for uneven income

12:13

sources. On the flip side what if

12:15

instead of uneven income sources you have

12:18

uneven expenses? What's an example of that?

12:20

Well maybe you don't have your mortgage

12:22

paid off. when you first retire. So

12:24

maybe the first five years, the first

12:26

six years, for seven years, you still

12:28

have a mortgage payment. So you have

12:30

higher expenses in the first few years

12:32

and then they'll start to taper off

12:34

later in retirement. Or what if you

12:36

want to travel a whole bunch in

12:38

retirement? But not forever. Maybe just the

12:40

first 10 years, the first 12 years.

12:42

Maybe you have a bigger travel budget

12:45

up front, but that lessens as you

12:47

grow older. Or if you have much

12:49

higher health care expenses later on in

12:51

retirement than you do at the beginning.

12:53

So these are different things where yes,

12:55

the simple framework that I talked about

12:57

is a great place to start. You

12:59

have to account for the fact that

13:01

typically your expenses aren't the exact same

13:03

adjusted for inflation throughout retirement. You might

13:05

spend more up front, maybe even more

13:07

on the back end for health care

13:10

expenses. How do you account for some

13:12

of those uneven expenses? Another nuance here,

13:14

of course, is tax considerations. So I

13:16

talked about the importance of understanding how

13:18

much is coming in from non-portfolio income

13:20

sources. Well, $30,000 of income from a

13:22

pension is a whole lot different than

13:24

$30,000 of income coming in from Social

13:26

Security. Not because of the dollar amount,

13:28

but because of the way that's taxed.

13:30

Social security in many states is not

13:32

taxed, and at the federal level, a

13:34

maximum of 85% of it is taxable.

13:37

Whereas a pension... Typically 100% of that

13:39

is going to be taxed both at

13:41

the state level, depending on what state

13:43

you're in, and at the federal level.

13:45

So the dollar amount is not what

13:47

we're looking at as much as what's

13:49

that after-tax amount of that income, because

13:51

it's not what you're bringing in, it's

13:53

what you're keeping that's ultimately going to

13:55

help you understand how much do you

13:57

need to meet your income needs in

13:59

retirement. If you're figuring out how much

14:02

you need to pull from your portfolio

14:04

from a portfolio, different than $40,000 being

14:06

pulled from a Rothire, right? One is

14:08

completely taxable, one's completely tax-free. So understanding

14:10

the difference between those is important when

14:12

determining how much you actually need to

14:14

pull out in retirement to meet your

14:16

needs. But then this is a big

14:18

one. What is the impact if you're

14:20

married when one spouse passes away before

14:22

the other? There is an extremely high

14:24

likelihood that you're not going to pass

14:26

away at the exact same time. So

14:29

let me use an example. What if

14:31

you're married? And both of you have

14:33

a social security benefit of $3,000 per

14:35

month, and you want to live on

14:37

$7,000 per month. What that means is

14:39

you have $6,000 of non-portfolio income. Your

14:41

$3,000 of social security in your spouse

14:43

is $3,000 of social security. That means

14:45

you only need to pull $1,000 per

14:47

month from your savings or your investments.

14:49

What happens when one spouse passes passes

14:51

away? You still need to pay, you

14:54

still have expenses of 7,000 per month.

14:56

Maybe that goes down a little bit

14:58

after one spouse passes away, but it's

15:00

not going to be cut in half.

15:02

And what you see is all of

15:04

a sudden the difference between what's coming

15:06

in and non-portfolio income sources and your

15:08

actual expenses, it goes from 1,000 per

15:10

month to 4,000 per month. It goes

15:12

up four times, which theoretically means the

15:14

portfolio value you would need to support

15:16

each of those withdrawal rates increases by

15:18

400 percent as well. So how can

15:21

you account for this on the front

15:23

end? How can you account for the

15:25

fact that yes, we want to be

15:27

able to support our needs, but understand

15:29

or be prepared for the impact of

15:31

one spouse pre-decies and the other to

15:33

say what would you do in that

15:35

instance to replace the lost income? So

15:37

as I hope you can see here,

15:39

retirement planning doesn't need to be incredibly

15:41

complicated at the outset. You should be

15:43

able to get a good sense of

15:46

how much do you need in your

15:48

portfolio portfolio to retire, How much will

15:50

you have non-portfolio income sources, and what

15:52

size does your portfolio need to be

15:54

to fill in the difference? Understanding that

15:56

is going to get you most of

15:58

the way there, because once you have

16:00

this plan in place, both the core

16:02

plan to understand some of these details

16:04

as well as an understanding of some

16:06

of the nuances, some of the contingencies

16:08

that might exist, you can go into

16:10

retiring with a lot of confidence knowing

16:13

that you have a plan in place

16:15

to support what you want to do.

16:17

Route financials not provided any compensation for

16:19

and has not influenced the content of

16:21

any testimonials and endorsements shown have been

16:23

invited, have been shared with each individual's

16:25

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16:27

the experience of other clients. To our

16:29

knowledge, no other conflicts of interest exist

16:31

regarding these testimonials and endorsements. Hey everyone,

16:33

it's me again for the disclaimer. Please

16:35

be smart about this. Before doing anything,

16:38

please be sure to consult with your

16:40

tax planner or financial planner. Nothing in

16:42

this podcast should be construed as investment,

16:44

tax, legal, or other financial advice. It

16:46

is for informational purposes only. Thank

16:49

you for listening to another episode of the

16:51

Ready for retirement podcast. If you want to

16:54

see how Root Financial can help you implement

16:56

the techniques I discussed in this podcast, then

16:58

go to Root Financial Partners.com and click start

17:00

here where you can schedule a call to

17:02

one of our advisors. We work with clients

17:05

all over the country and we love the

17:07

opportunity to speak with you about your goals

17:09

and how we might be able to help.

17:11

And please remember, nothing we discussed in this

17:13

podcast is intended to serve as advice. You

17:16

should always consult a financial, legal or tax

17:18

professional who's familiar with your unique circumstance. chances

17:20

before making any financial sessions.