Columbus, OH
(614) 407-4746

How Much Money do I Need to Retire?

How Much Money do I Need to Retire?

Client Question:  How much money do I need to retire?

Advisor Answer:  It depends.  Ultimately, the answer to this question depends on the length of your retirement and how much money you will need to withdraw from your investment portfolio in order to support your living expenses during retirement.  Two other variables that will impact how much money you need to retire are the tax structure and the investment returns of your portfolio.

What is the percent chance your assets will last through your retirement?


This chart from shows the expected chance you will be able to retire based on:

  1. The initial withdrawal rate from your portfolio.  The amount of money you need to withdrawal from your portfolio to support your living expenses divided by the total size of your portfolio.
  2. The length of your retirement.  The period of time starting at your retirement date and ending at your date of death.
  3. Investment allocation.  The percentage of your portfolio invested in stocks vs. the percentage of your portfolio invested in bonds.

As you can see on the far right side of the chart, BlackRock is suggesting that the green boxes represent the “sweet spot.”  A confidence level of 70%-90% is “sufficiently high without undue sacrifice.”  An example of how to interpret this chart is given at the bottom, “If you plan on being retired for 20 years, have an allocation of 60% stocks and 40% bonds and plan to take 6% inflation-adjusted withdrawals, you have a 50%-60% confidence interval that your assets will outlast your 20-year horizon.”

Logically, one can see that understanding how much he or she will spend during retirement is the key to answering the initial question of how much money is needed for retirement. For many people, understanding how much money they are spending now is a daunting question (let alone how much money they will spend during retirement!).  This alone may be reason enough to meet with a financial planner.  According to the BlackRock chart, if you retire at age 60, expect to have a 30-year retirement, and have a 3% withdrawal rate then you should be good to go.  Assuming a retiree wants to live off of $100,000 of income per year (all of which is taken from the investment portfolio), a portfolio of ~$3.33 million is needed ($100,000 / 0.03).

There is one big wrench that can get thrown into this equation though.  Inflation.  Let’s assume you are 40 years old, expect to retire at age 60, and would be comfortable living off of $100,000 per year.  The problem is that $100,000 will likely not have the same purchasing power 20 years from now as it does today.  Assuming a 3% inflation rate, $100,000 today is the equivalent to ~$180,000 in 20 years.  So, instead of needing a $3.33 million investment portfolio, you would actually need a $6 million portfolio ($180,000 / 0.03).  Quite a bit of difference!

How do taxes impact your retirement?

To provide an extreme example, let’s say that John has a $2 million Traditional IRA and Jane has a $2 million Roth IRA.  Both John and Jane need $100,000 per year during retirement to pay for living expenses.  If John withdraws $100,000 from his portfolio, he will also have a tax liability at the end of the year of ~$21,000 since withdrawals from Traditional IRAs are taxed at ordinary income tax rates.  So, he will actually need to withdraw $121,000 instead of $100,000, which will increase his withdrawal rate from 5% to just over 6%.  On the other hand, none of Jane’s distributions from the Roth IRA will be taxable, so her withdrawal rate will stay at 5%.  Even this 1% difference in withdrawal rates can make a significant impact in terms of portfolio longevity as shown in the chart above.

Above is an extremely simple example; however, in reality, these decisions are much more complex.  The key for retirees is to have a tax efficient withdrawal strategy where they withdraw the “right” amount of money from the “right” accounts.  Optimal tax management can dramatically impact how long assets will last throughout retirement.  Although retirees can benefit significantly from optimal withdrawal strategies, it is best to start building a diversified portfolio (from a tax perspective) in the early years so one has the ability to benefit from lower taxes during retirement.

How should your investments be allocated during retirement

You can see in the chart above that BlackRock is showing the impact of using various asset allocation models based on a stock vs. bond mix. For example, 60/40 means a portfolio invested in 60% stocks and 40% bonds.  Historically, many advisors have based retirement portfolios off of a 60% stock and 40% bond mix; however, this can mislead the casual investor.  The 60/40 mix that many investors reference is based on a portfolio of 60% large capitalization U.S. dividend paying stocks and the 40% bonds is based on high credit quality U.S. bonds.  It is now widely recommended to have exposure to international stocks/bonds, bonds of different credit quality, and stocks of different sizes, so this old 60/40 mix may not be optimal.

Optimizing the investment allocation of your portfolio should, in theory, result in improved returns with less volatility.  Ultimately, higher returns and less volatility should lower the withdrawal rate from your investment portfolio during retirement, which will increase your chances success.

To learn more about how Caligiuri Financial may be able to help YOU, click here to schedule a complimentary consultation.

Do you want to get on the right track with your financial life?  Check out our One-Time Financial Plan.

Are you too busy to manage yours or your family’s financial affairs?  Check out our Financial Planning Partnership.

Caligiuri Financial, LLC (“Caligiuri Financial”) is a registered investment adviser offering advisory services in the State of Ohio and in other jurisdictions where exempted.  Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Caligiuri Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Caligiuri Financial, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.