Your Retirement Investments Are Only Half The Equation

Retirement investors often focus on “the number,” with good reason. How much you have saved and invested over the years will determine your retirement lifestyle for sure.

If you have Social Security, that’s a good chunk of money coming in that will be inflation-adjusted as you age. Same with Medicare. If you get a pension, so much the better.

Consider that your base income, the fundamental cash flow that covers your basics. Now, what can you expect from your tax-deferred savings and investments?

A good rule of thumb is 4%. That is, if you have $1 million an IRA, you could take out $40,000 a year. In 25 years, the account will be empty. That’s just math.

If you manage to invest it well in retirement, of course, you can expect that money to grow even as you spend it down. How much depends on how you invest the balance, inflation, and, of course, how much you spend.

And that’s the important “other half” of the retirement equation: How much will you spend in retirement.

The website HowMuch ran the numbers in all 50 states and found a fascinating disparity in how long $1 million lasts per state.

If you live in a southern, rural state, say Mississippi, Arkansas or Tennessee, your cost of living means a million bucks will last about 25 years. If you retire at 65, then, your money doesn’t run out till age 90.

The other extreme would be Hawaii (13 years), Washington, D.C. (14 years, two months) and California (15 years).

How much you spend in retirement has a lot to do with your relationship with money today.

For instance, many retirees “upsize” their mortgage as they get close to retirement. They move into something larger or buy a second home.

People also move into high-tax states for the final years of their professional careers because that’s where the jobs are — then stay there after work stops. They begin to spend money to finance the college careers or business ventures of their children.

Or they take up expensive new hobbies, such as international travel, travel to pro sports events and eating out far more than before. It adds up fast!

Realistic budgets

There are several ways to solve the retirement income quandary. One is to make more on your investments. Compound interest on your investments can greatly increase your options come retirement time.

Another is to just work a while longer than you expected. Not to necessarily invest more (though that would help) but to let your current investments compound for longer. Every extra month at the end of the cycle matters a lot.

The third and most powerful is to be very careful about your realistic retirement budget. Pay down all debts and mortgages, avoid new debt and carefully consider where you can afford to live your best retirement life.

The answer might be where you are now but in a smaller or cheaper home. It might be downsizing and changing states.

Getting these numbers to line up is the key to a solid, long-term retirement plan that works.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.