How Much Do You Need To Be Able To Spend $10k/month?

Create Your Custom Early Retirement Strategy Here

Ever imagined a life of comfort in your golden years, spending $10,000 a month after taxes? Well, buckle up as we debunk popular myths and instead introduce you to the 'guardrails approach' to retirement planning, emphasizing the need for a sustainable plan tailored to your individual needs. Toss aside those rigid figures and start focusing on variables such as social security, pensions, and desired spending to provide a personalized roadmap to your retirement. 

Dive deeper as we navigate the complexities of early retirement, from the rule of 55 right down to the tax implications. Ponder about the 'house rich, cash poor' scenario and recognize the importance of a well-rounded portfolio. Health insurance is another key player that demands your attention. Let's not allow the process to overwhelm you, rather push you to seize control of your financial future. So, are you ready to transform your golden years into a treasure trove? Let's dig in!

Create Your Custom Early Retirement Strategy Here

Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients navigate the nuances of an early retirement.

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PS: Before anyone decides to move forward with our services, I want to ensure we're the best fit to help you reach your goals and I personally have the first conversation with you.

Transcript

Speaker 0: 0:00

How much money do you need so that you can spend $10,000 a month after taxes, every single month throughout retirement, when you are retiring early? None of us know how long any of us are going to live, but the last thing I want to have happen is that you run out of money or that you retire too early and you can't spend what you want to spend. So in today's podcast episode, we are going to explore exactly how much money you need so that you can spend $10,000 a month, and I'll give you a few other examples as well. Now, today's episode was prompted by listener question another great question. So thank you guys for submitting your questions. I feel like I truly have the best podcast listeners in the world, because I listen to a lot of podcasts myself, and they'll say, yeah, go submit your question, but I know I personally never do, because I just don't think it'll get addressed. However, I want you all to know when you submit these questions, I am literally trying to make this show as effective for you. So I'm going to give you the straight answers of hey, you want to spend $10,000 a month, or $8,000 or $5,000, here's exactly how much you need, and then, during the latter half of the episode. I'm going to walk you through the math of how I get there, because I know some of you are just like just tell me the answer, what do I need? Others of you are going hey, I want to really know how this works. Where are you coming up with this? So I want to make sure both of you if you can put yourself in one of those buckets are getting the answer that you want.

Speaker 0: 1:12

So this listener question comes from George. I'm going to read this question now and George says feel free to use my name, love the podcast and thank you for the information. You're welcome, george. I'd like to spend $10,000 a month. From my basic projections, it seems I can do so, but I'm not sure. I want to retire early and I know this money will be needed for some time. Health isn't the greatest, but want to plan for age 95 just in case. Please tell me how much I need. So great question from George, who says I want to spend 10,000 a month.

Speaker 0: 1:40

Now I'm going to make some assumptions here, and the first assumption, george, is that you want to spend 10,000 a month after taxes adjusted for inflation. So you want $10,000 every single month. Almost think of it like a paycheck and you can go spend that however you see fit. It can go towards a mortgage payment If you sell the mortgage. It can go to travel, it can go to whatever you'd like, but you want a paycheck to spend $10,000 a month after taxes, or $120,000 every single year in retirement.

Speaker 0: 2:08

Now I'm going to tell you just a real quick answer, george, which is you're not going to spend 10,000 every single month, even if you think you will. You won't. Because I have clients right now who are retired early and they're spending more than 10,000, and they came to me wanting to spend 10,000, and I'm encouraging them to spend more because in the years you have your energy and health. I actually want you to. I just want you to do it sustainably. No, you're not going to run out later, and too many people do not give themselves a bonus when markets are doing well, because they're worried when markets don't do well. Oh my gosh, am I not going to be able to spend then, if I spent too much at the beginning? And I don't want them to think that way either. So what you have to do is have a plan that tells you during what time of the market, when it's doing XYZ, when can you spend a little bit more and when can you temporarily scale that back, and that's called the guardrails approach to spending. So that's one thing I'm going to address at the end of today's podcast.

Speaker 0: 2:56

But what I really want, to make sure you're all taken away, because I'm sure at some point you're thinking, yep, similar to George, I want to spend 10,000 month or 5,000 or 8,000 months. But I've got a quick fun fact for you all. And the fun fact is, if you're thinking through what is the average cost of retirement this comes from the Bureau of Labor Statistics the answer is $52,000. Now, that's a good place to start, but a lot of you want to spend a whole lot more than that, and a lot of you want to spend, I'll say, a little bit more than that. It's very rare that I'll see less than that.

Speaker 0: 3:25

So sometimes people are coming to me and I'm just going to come take away a few myths real quick, because I want to give you these straight answers. Trust me, I get it. I listen to podcasts as well, but I also want to make sure you are not thinking about any what I call head trash, okay? So a lot of people are coming to me for guidance and sometimes I'm telling them here are five things I want you to think about and here's a hundred I don't want you to think about. So here's the big one.

Speaker 0: 3:47

Okay, if you are going online and you see an article that says you need a million to retire, or two million, or five million, or 10 million, they are all wrong. Okay, now, they're all wrong not because they're bad people who are writing them, but they're wrong because they have no idea what amount is coming from social security. They have no idea if you have a pension. They don't know if you have rental income. They don't know what you want to spend.

Speaker 0: 4:07

So by just saying, hey, you need a million bucks to retire, some people will come to me and they're like, hey, I just don't think I'm on track, I've only got eight 900,000,. Do I have to work five, 10 more years? I go, depends. What other income sources do you have? And they'll say, yeah, well, I've got a pension and you know it's going to cover all my needs. I go then you don't need a million dollars. So just don't be cookie cutters. You look at planning. You might have rental income, you might have inheritance, you might have stock options. All of this has to be configured, so I just don't want any of you needlessly stressing going, oh my gosh, I don't have a million dollars, am I not going to be okay? Also, you're going to get good growth on your assets if you're investing well, so make sure you're always thinking about that.

Speaker 0: 4:43

Now let's go to my specific examples here, and I've got a few noted down. If you're listening to this on the podcast app great, that's how you listen to most of my episodes. I imagine some of you prefer the YouTube style and I'm going to start to post this video of me recording this podcast. So if you actually want to see me go through this, I might put a few fun examples up on the screen might help you follow along, but you do not have to. Okay, I know a lot of you are going, hey, youtube's great, but I just like the podcast app and I can put you on 2X speed and go through this. So if you're listening to me on 2X speed, you are impressive. Okay, let me tell you that right now.

Speaker 0: 5:14

So how much money do you need to live on? $10,000 a month. Here is the answer. The answer is that I'm making some assumptions here. I'm going to give you the assumptions, give you the answer, and then the math is going to come a little later. So the assumptions I made are the following that you are retired, you want to spend $10,000 every single month. Okay, that's just not realistic, because there's something called the retirement smile and it's summarized by the fact that you have your go-go years, your slow go years and your no go years, which is, you might spend a whole lot more at the beginning than maybe a little bit less in your 70s and 80s. Then you might have a whole lot more at the end and you go I don't want to die with $10 million, I need to spend more. There's medical expenses. So I'm assuming, george, that you're going to spend $10,000 every single month until you pass away. It's unrealistic, but let's just use it for simple math. Now I'm also going to assume that you have $4,000 a month coming from Social Security. I'm then going to say, okay, if $4,000 is coming from Social Security and you want to spend $10,000, $6,000 has to come from somewhere else. The question is is it rental income? Is it a pension? Is it stock options? Like, how are you doing this? And I'm just going to assume it's in a portfolio, so that portfolio needs to send you $6,000 a month so that you can spend $10,000 a month, because you already have four coming from Social Security. So hopefully that follows.

Speaker 0: 6:25

So far, let's keep it really simple. Now I know a lot of you are going what about taxes? What about Social Security? It's taxed differently. I'm going to go through that, I promise you, but I want to make sure that those of you that tune in and go hey, I just need to know the answer. I'm already about six and a half minutes in here. I want to give you that answer because I know you guys are busy people. So I'm looking at a sustainable withdrawal rate and if you invest your funds well, ignoring the taxes not ignoring, I'm factoring in the taxes, but without giving you the whole story of how I come up with what is the effective tax rate in Social Security, provisional income tax and all this fancy stuff. The answer is and I just took out my calculator to literally do this with you guys on the fly is I'll say okay, if $6,000 a month is what you need, $6,000 times 12, super simple math you need $72,000 a year to come from your portfolio. Now we have to account for taxes, and I'm making an assumption here of an effective tax rate of 10%. So it doesn't mean every single dollar's tax at 10%. We have a marginal system. So here in the US it varies based on your levels of income, how much you spend, how much you pay in taxes. So what I'm gonna do here I just mean effective tax rate, saying 10%. So what that tells me is about $79,000 needs to come from your portfolio so you can account for taxes and still end up with that same 6,000 a month after taxes, hopefully following so far. Now what I'm gonna do is I take that number and then I'm gonna divide that by a sustainable withdrawal rate. Now, a sustainable withdrawal rate?

Speaker 0: 7:51

A lot of people talk about the 4% rule. Other people say you know what I heard. You talk that 4% rule, just not that applicable to an early retirement, which is true. So I'm not gonna go on a tangent, I promise you on the 4% rule. But I don't love the 4% rule because it's not designed for an early retirement. It's designed for traditional retirement from 65 to 95, which a lot of you have no interest in. So what I do is I take that 79,000 that needs to come from your portfolio and I divide that by 5%.

Speaker 0: 8:18

Now I think you can do more than that. In fact, I know you can because John Geithner's study called the guardrails approach shows you can if you invest well and follow certain rules. But the answer is about one and a half million bucks. Okay, it's about $1.5 million, about a little more than that, but let's just say 1.5 to keep it simple. Meaning if you have one and a half million dollars and you wanna make sure that you can retire comfortably and spend 10,000 a month and you invest the right way and you follow the right rules and when you pull from the right accounts, you are in a good spot, okay. Now that assumes 4,000 come from Social Security. So a lot of you wanna know the math behind this and I'm gonna go through it. But before I do that, I'm gonna give you the same example. If you wanna spend 8,000 a month, now I can do the same exact thing, whether it's five or 15 or 20, and a lot of you know my joke by now, especially a lot of my clients.

Speaker 0: 9:05

But I grew up in Malibu, california, very affluent area, and I've talked about my parents often on the show and a lot of you are like, wow, are they okay with you talking about this? I go, they want me to okay, because they don't want you guys to end up working in their 70s. Now they are house rich, cash poor. What does that mean? It means they have a home with six, seven million bucks in Malibu and it's beautiful and everyone's jealous, but they're still working in their 70s Now. Luckily, they like what they do. But I'm telling you this story because they don't wanna be working to the same degree that they're currently working. And so house rich, cash poor. So you have a really healthy net worth, but it's not worth a whole lot because you can't stop working.

Speaker 0: 9:38

The name of the game in retirement is cash flow. So I saw the risk of bad planning growing up and I saw the value of good planning and you wanna be on the good side and that's why I love doing what I do. So why am I telling you this? Because there's a lot of characters okay, I'm putting it nicely, a lot of characters in Malibu that wanna spend 40,000 a month, and there's nothing wrong with that. But if you wanna spend 40,000 a month, your financial plan needs to look a lot different. And it's not one and a half million bucks, it's 10 million plus. Okay, so nothing wrong. Once again, if that's you.

Speaker 0: 10:05

A lot of my clients do have those types of assets and if that's what you wanna spend, I want you to spend it. I just don't want you worrying, okay, now back to my example. So let's assume you wanna spend 8,000 a month. Same example here 4,000 is coming from Social Security and then another 4,000 has to come from your portfolio. So, if I'm accounting for taxes, very simple, about a million dollars a little bit less than that is needed so that you can retire comfortably. Spend $8,000 a month, okay.

Speaker 0: 10:32

So if you're wondering, am I even in a good spot? Like, how am I thinking through this? The answer is if you have a million plus dollars and 4,000 is coming from Social Security right now, well, yeah, you're in a pretty good spot. If you're open to investing the right ways and you don't have any gaps in your plan of insurance, and tax planning is gonna be taken care of and all this good stuff, you're gonna be in a good spot, okay. So part of my job is literally making sure you sleep better at night. Not because I'm in the business of rosy pictures. You know this by now. I'm not. I'm in the business of you all retiring early, not second guessing. Am I gonna have to, you know, no longer go out to eat, or can I no longer travel to the degree I want to? So those are some things to think through.

Speaker 0: 11:10

Now let's go through the math. Okay, so Social Security is taxed differently than if you're just taking money From your portfolio. Okay, so Social Security has a rule called provisional income tax, which means only a portion of your Social Security is actually included in your taxable income. It gets complicated quickly, but I have videos on it and I have another podcast going through Social Security tax and how it works. So I'm not going to bore you to the point where you'll fall asleep here, but I want you to know the following, which is what I was going through my example here, which I'm just looking at on my screen, if you're watching on YouTube, a maximum of 85% of your Social Security is taxable income.

Speaker 0: 11:46

Okay, so, as I'm looking at this example here, let's go back to the $10,000 a month. I'm assuming an effective tax rate, meaning a blended tax rate of 10%. So what does that mean? That means, you know, if you're here in the US the first, you know $20,000 or so, I don't have it in front of me, but it's tax at 10%, then 12%, then 22%, then 24%. So what you want to do is understand what is your effective tax rate now when you retire.

Speaker 0: 12:12

A lot of you are going, hey, I'm gonna be in like the 0% tax bracket, like I don't need a whole lot of income Because I have my Social Security and it's not gonna get taxed a whole bunch because my income is really low because I'm no longer working, and that's true. But the big thing I'm harping on here, guys, is you need this $6,000 to come through your portfolio. We didn't talk about where it comes from. Is that coming from a Roth IRA? Is it coming from an IRA? Is it coming from a brokerage account? That's gonna really change your portfolio, because one, if you're gonna retire early before 65 and let's call it 55, to take an extreme example Well, you can't just pull from your IRA. There's taxes and there's penalties.

Speaker 0: 12:49

Now you can use the rule of 55 and if you're not aware of what that means is, when you retire early, as long as you are retiring 55 or later from your current employer, you can elect to use your 401k to create income that helps bridge the gap, except pro tip. What you don't want to do is just say you know what? I've got this great brokerage account, but I saw already talked about the rule of 55, so I'm gonna do that. We don't want to do that. Okay, the rule of 55 is great if you have no other options, if you have a brokerage account or if you're selling your home. I'd rather you use those assets because more often than not, a lot of you that are coming me are going to get crushed by RMD's later. Rmd stand for acquired minimum distributions, which, when the government forces you to take out more money than you even want to. So using a brokerage account to do things like Roth conversions and keeping your income really low, it can be wonderful.

Speaker 0: 13:39

So I was just using a 10% effective tax rate in this example. So what I did is I essentially took that 72,000 or 6,000 every single month that you needed. I said, okay, if that's what we need, let's take 10%, cut 7200 bucks and add that on top for taxes so that when I'm sending you 6,000 a month, we're not just going well, let's figure out the taxes later. So that's a conservative estimate. Some of my clients are, in a way higher tax bracket because they have pensions and rental income and so on, and if that's the case, that's great once again. But we might need to factor in a whole lot more than 7200 bucks for taxes to spend to send you 72,000 every year. I've seen it be three times that, and so you just need to account effectively based on your tax situation.

Speaker 0: 14:22

Okay now Social Security. Once again, a maximum of 85% is including your taxable income. So if we're using my same example of 10% effective tax rate, 85% of that, 10 of 10% I know it's confusing, stick with me. So if 10% is the effective tax rate, 85% of that is 8.5%. That's the most that's going to get taxed once again, the most for Social Security. So it's not as if you're going okay, already said, the effective tax rates 10%. That means that everything Social Security and my portfolio and dividends and interest it all gets taxed at 10%. That's not how it works. Everything is taxed differently.

Speaker 0: 14:59

So once again, going through how much you need. If you wanted to spend 10,000 every single month, george, for the rest of your life and you have no rental income, no inheritance, you're solely have Social Security between you and your spouse of 4,000 a month coming in, I'd say one and a half million dollars. That's what you would need so you could go live comfortably. Now you might have three million bucks, you might have four million bucks, you might have five million bucks, but I want to make sure you know what's the most you can spend. Okay, so why I'm going to tell you this is I'm doing my calculator right here and, as I'm looking at a $5 million portfolio because a lot of you have a similar portfolio going how much can I spend?

Speaker 0: 15:37

A lot of you know my dopey joke, but I'm gonna give it to you again, which is someone came to me. I'm not gonna say their name, but they came and said all right, I'm gonna be one of your best clients. I have a super low withdrawal rate because I don't need to take out a lot of my portfolio. I'm gonna be one of your best clients. And I told them you'll be one of my worst clients, not to be mean, but because the goal in life is not to have the lowest withdrawal rate. If you wanted to do that, go work 50 more years. Your plan will look great. All of you are telling me you wanna prioritize your health, you wanna spend more time with family. You don't wanna work a stressful job, you don't wanna deal with commuting Great, how soon can you retire early with confidence? That's why we're having this conversation and I truly feel this is a conversation.

Speaker 0: 16:15

So, $5 million, if we're looking at you know what's a sustainable withdrawal rate there. If you had $5 million, I would feel comfortable saying you could spend up to $260,000 a year. Now the question is is that $5 million all in a Roth IRA? Is it in an IRA? So, for example, someone came to me and they're like all right, I've got a million dollars. I'm like no, you don't they go. Yes, I do. I see it in my account. Right here I go, you have $750,000. What you're not accounting for is taxes and they're like oh yeah, I knew that, I just didn't wanna kind of worry about it. So just make sure, as you're going through this, you're not ignoring taxes, you're not ignoring inflation and things like that.

Speaker 0: 16:49

Now, a few other factors that, of course, influence all of this that I glossed over, but I just try to keep it simple. I'm telling you guys, there's a lot to this. Don't get overwhelmed. So many people get that analysis, paralysis and it's oh my gosh taxes, oh my gosh. Social security. How do I think about all this? I'll figure it out with either help of a planner, which is, of course, why I exist.

Speaker 0: 17:09

But beyond that, I see people not take action and they go health insurance. I don't know what that's gonna cost. I'm gonna keep working. I've never not had traditional health insurance. Don't let that be you. Okay, I'm not saying health insurance is in a big cost it is but I'm saying make sure to absolutely think through it and know how to plan for it. Okay, the thing I want you to think through some takeaways is this ignores a pension, rental income, part-time work, inheritance. It's just a super simple example for George. And if, george, if you came to me, this is how I'd walk you through it.

Speaker 0: 17:39

Now it also depends retirement benefits, social security. What if something happens to your spouse and you're going? Well, 2,000 is coming from me and 2,000 from my spouse. That just went away. So now what happens to this plan? Well, now you can't spend that same 10,000 a month. The plan needs to change.

Speaker 0: 17:53

So my dopey joke, which my clients know all of these by now. So sorry, clients for hearing these again, but I don't do plans, I don't do financial plans Like, yes, you do I go. No, I do planning because tax law is gonna change, legislation is gonna change, what you wanna spend in retirement is gonna change and I want your plan being dynamic with those changes. So, social Security benefits the latest you could collect is age 70 to maximize your benefits, the earliest is 62. So what I just explained today is you're getting 4,000 a month.

Speaker 0: 18:22

The question is most of you, not a question. The statement is most of you are not just gonna have 4,000. It's gonna be one spouse turns on Social Security earlier than the other. That changes the whole planning projections. There's a lot to this, but I'm just trying to keep it simple. And then, what are your actual expenses? So, 10,000 a month.

Speaker 0: 18:38

Some of you are like, hey, that's great, but I'd love to spend more while I have my energy and health Maybe 11 or 12 or 14,000, because I know later I saw my parents or I saw my friends, or I've heard enough of your podcast where you talk about your client stories that I'm just not gonna spend 10,000 a month. So how does that change the plan if I wanna spend maybe 7,000 a month and plan on that for 10, 15 years, for maybe 70 to 80 or 70 to 85? Make sure to plan that. In. The only way, in my opinion, you can effectively do this is with good planning, meaning good software that helps you do so and then a good planner that gives you the confidence to do so. So, once again, if this is something that you guys all are looking for custom guidance on it's what we love to help you do. So. Link look in the description of today's podcast episode and you will see a link where you can apply to work with us.

Speaker 0: 19:23

I hope that this was helpful, giving you some insight as to what you need in your portfolio if you wanna spend 10,000 a month or 8,000 a month. We can keep going through these examples. Let me know, guys, if this was all helpful. As always. Appreciate you listening and tuning in. Love you guys. Thank you for listening to another episode of the Early Retirement Show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcastcom. That's earlyretirementpodcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.