Can We Live on $90,000 Per Year in Retirement?
Terry, a 65-year-old individual, is questioning whether he and his wife can live comfortably on $90,000 per year in retirement. With his wife soon to retire and himself planning to work until he’s 67, they will receive around $42,000 in Social Security benefits and have approximately $1 million in savings.
Determining whether $90,000 per year is a feasible amount to live on depends on several factors that are unique to Terry and his wife’s situation. It is recommended that they consider the following aspects before making a decision. Additionally, seeking advice from a financial advisor can be beneficial for proper retirement planning.
1. Consider Taxes: Terry needs to determine whether the $90,000 expense includes taxes or if it is the amount they plan to spend after taxes. This is crucial because if it’s the latter, they will have to withdraw more from their savings each year, which can put strain on the longevity of their portfolio. The type of accounts their savings are held in (tax-deferred, Roth, or taxable) also affects their tax obligations.
2. Assess Investment Plan and Risk Tolerance: Terry and his wife should evaluate their investment plan and risk tolerance. Having a portfolio that is too conservative or aggressive can impact their savings. Being too conservative may hinder their ability to sustain their spending over time, while being too aggressive can expose them to excessive volatility, which can harm their portfolio during withdrawal periods. A balanced approach, such as a 60/40 portfolio, may be suitable for retirees.
3. Determine Withdrawal Rate: Another important factor is the withdrawal rate. The general rule of thumb is to withdraw 4% of savings in the first year of retirement, adjusting for inflation in subsequent years, to ensure the money lasts for around 30 years. However, Terry may need to modify this guideline based on their specific circumstances. Depending on the expenses covered by the $90,000 and their desired retirement duration, their withdrawal rate could be around 5% or higher.
In conclusion, whether Terry and his wife can live comfortably on $90,000 per year in retirement depends on various factors. They should consider their tax obligations, investment plan, risk tolerance, and withdrawal rate to determine if this amount is sustainable. Seeking guidance from a financial advisor can provide personalized advice and assistance in making informed decisions about their retirement finances.