Preparing for Retirement: How Much Do You Really Need?

Updated on June 9, 2015

Screen Shot 2015-06-09 at 7.12.36 AMBy Michael Brady

When people retire at age 65, they’re usually solely focused on principal preservation. This is justifiable since any losses incurred will not be made up through additional earning contributions.  However, chances are you will still have many years of life expectancy left to make up for it.  According to the Social Security Administration, there is a 47% probability one spouse will live to age 90 or beyond. This can make knowing how much you really need for retirement a hard number to estimate.

Careful preparation and planning can help you feel more financially stable during retirement. It can be scary to suddenly not have much income and be reliant on savings, but there are ways to insure that you are comfortable in your living situation.

Grow your assets

Simply leaving your funds in CDs or bonds may not be an option for many people.  The assets have to continue to grow or maintain their value, with the understanding that withdrawals will increase to keep up with inflation.

The probability of outliving your money is influenced by a few variables:

  • The beginning value of your portfolio.
  • The amount of your withdrawals.
  • How long your withdrawals last.
  • The earnings rate on the portfolio.

Other variables like taxes are important too, but for simplicity we’ll just assume everything is gross. To keep things simple, the lower the rate of withdrawal, the higher the probability that you money will last.  But, what is that number?

To answer that, let me first share that I am very influenced by the book “Unveiling the Retirement Myth” by Jim Otar.  He’s done a wonderful job analyzing historical returns, including the uniquely bad times like 1987, 2000 to 2003, and 2008.  Using the numbers for the S&P 500 and a fixed income yield of a 6 month CD + ½%, he has determined that over a 30 year time withdrawal horizon, 100% of the time a 3% withdrawal worked as long as you had between 40% and 60% in the S&P 500.   With only 20% in the S&P 500, you had a 99% probability of your money surviving.

With a 3% withdrawal over 40 years, only a 40% in S&P 500 allowed a probability over 90%, with having too much or little in the stock market harming you at different concentrations. 

When I’m working with clients, I steer them toward 3% to 4% withdrawal, and if they’re going to need more than 4%, then they should consider a guaranteed withdrawal income rider available on many variable annuity contracts.

What to do if you’re falling short

There are a few things you can do:

  • Focus on your expenses, and reduce the amount needed for withdrawals.
  • Transfer the withdrawal risk to an insurance company through a guaranteed withdrawal benefit rider, where the insurance company allows you to keep your money in variable subaccounts but yet you’re still guaranteed a minimum amount you can withdrawal for life.
  • Purchase a life annuity, where the investor transfers a principal amount to the life insurance company and they guarantee a certain amount per month for life.
  • The real answer is some combination of the above strategies. 

One thing to avoid is trying to “go for broke” by thinking, “I want a high return, so I’ll go high risk.”  The reason why something is called “high risk” is because there is an equal or greater chance of losing money versus something else, but everyone forgets that part.  Just because you take high risk does not mean you get high return, it just means you might have the opportunity for it, but then you might also have an opportunity for a loss on the other side.

The best thing you can do when getting ready for retirement is prepare, plan, and educate yourself. Knowing all of your different options and diversifying is the safest way to go and anyone’s best shot at staying financially stable throughout retirement.

Michael Brady is the president of Generosity Wealth Management, a mission-based firm located in Boulder, CO dedicated to investors seeking to grow, preserve and distribute their wealth in an efficient manner to ensure the well being of their family and their interests. Learn more at


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