One of my clients once told me that the biggest lesson he learned in retirement was this. You don't retire on a Lump Sum of Money. Rather, you retire on the INCOME which the Lump Sum of Money can create. Think about that statement for a bit. Let it sink in. In fact, let me repeat it, because this is what retirement means. You don't retire on a Lump Sum of Money. Rather, you retire on the INCOME which the Lump Sum of Money can create. You spend your working career saving, accumulating, investing, and building a "lump sum". At some point, you will want to use it for income.
Soooo.....what exactly is a "Lump Sum of Money"? Is it $100,000? $300,000? How about $1,000,000? More than that?
The best way to answer that is that the amouth may be different for everyone. However, we can help you to narrow down what you amount should be at retirement. Here are 4 steps.
1. Determine your monthly budget. You don't want any debt at retirement. Leave plenty of
room for "Miscellaneous" expenses - travel, kids, hobbies. If you aren't working, you are
2. Determine your Social Security Income amount. There are 3 categories for Social
Security income - Reduced Benefit (usually age 62), Full Benefit (usually age 66), and
Enhanced Benefit (age 70). As the terms suggest, if you take Social Security at an earlier age,
you are "stuck" with a smaller amount of income - and "Grounded For Life." There has also
been a growing movement for proposed changes in Social Security in order to make the
money last longer. At least one of those changes includes pushing back the age for Full
Retirement Benefits, which would force most of us to work longer. Whatever benefit amount
you select, you need to know the amount so it can be applied to your budget.
3. Do you have other sources of income? These may include rental property, part time
work, or anything else which generates income.
4. Look at your budget again, and deduct your budgeted expenses from your total
This sounds simple - and it is- however you would be surprised at how many people don't do
it. Do you have enough income to cover your expenses? Is there money to do "special" things
you want to do in retirement? Travel? Golf when you want?
If there is a "gap", how much is the gap? Let's assume there is a gap of $800/month. $800 x
12 months = $9600/year. Now let's take $9600 and divide it by .04. (4% is a reasonably
"safe" amount to withdraw from a lump sum.) $9600/.04 = $240,000. Now we have a "lump
sum" goal of saving for retirement. This can be saved in your 401(k), IRA, Roth IRA, or
ordinary savings. Do not retire until you have this amount saved to cover your additional
In a future article we will look further at annuities and how they can provide income for life. We also need to consider the impact of inflation on your savings.
For more income on annuities or on budgeting, please contact me at http://www.helpmy401k.us. You may also follow me on Twitter at www.twitter.com/deanvoelker