September 25, 2017
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How Much Is Too Much?

Jason LaBarge
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August 10, 2017

I am often asked by clients how much money they are going to need in retirement. They will ask whether 80 percent of their working income is enough. Is it 100 percent? My answer varies for each client, but I generally answer with “whatever is appropriate for you to pay your bills.” While it may sound like I haven’t put much thought into this answer, this is the correct answer, and trying to determine a percentage that works for everyone is neither pertinent nor applicable to each person. I describe this process as determining your “family index.”

In 1994, a financial adviser by the name of Bill Bengen created what he called the “SAFEMAX rate,” which he calculated as 4 percent. Most of us have probably heard of this rule. It states that if you withdraw 4 percent of your portfolio on an annual basis, you will more than likely not run out of money. The Trinity Study in 1998 confirmed this calculation, stating that it is indeed a logical rule of thumb to use 4 percent as your withdrawal rate in retirement from a portfolio built primarily of equities. The assumption here is that a person will withdraw 4 percent of his or her portfolio in the first year of retirement and then the portfolio will grow by the consumer price index each year moving forward.

Most people planning for retirement are frugal and responsible savers, meaning they have a difficult time spending money. I recently hosted clients who had just sold their home. They are building a new home in a 55-and-over community, but the house will not be available for another six months or so. Where do they live in the interim? They were looking at houses in Annapolis, Severna Park and surrounding areas, but they talked to me about a place in Ocean City because it was considerably less expensive than the places they saw in Annapolis and Severna Park. My point to them and my point here is that the reason you spent your life saving your money is for times like this. You need to spend some of that money and it is OK to do so. We need to remember why you worked so hard in the first place.

It may sound like wishful thinking or irresponsible to just proclaim that spending money is OK regardless of the amount or purpose just because you are retired or because you have the money. But I was able to tell my clients to find the place they like and not focus as much on cost because we have built them a sound financial income plan. They know that each month they are going to receive a certain amount unequivocally. That is the comfort provided from having a sound income plan.

Opinions expressed are those of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.

To contact Jason LaBarge, call 443-837-2531 or email jasonlabarge@premierplanninggroup.com.


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