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Reaching $2 million in retirement savings is a significant milestone. But as retirement gets closer, the size of your portfolio is only one piece of the puzzle.
Two people can retire with the same amount of money and be in very different financial situations. One may need $60,000 per year from their portfolio, while another needs $120,000. Taxes, Social Security, pensions, account types, and future expenses can all affect how far those savings may go.
While we're using $2 million as an example, there is nothing particularly significant about that number. The same questions apply at different portfolio sizes. The answers will simply be different.
Here are five questions worth considering as you approach retirement.
1. How Much Do You Actually Need From Your Portfolio?
Rules of thumb around withdrawal rates can be helpful, but they don't tell the whole story. The more important question is how much of your spending must come from your investments.
For example, a couple spending $100,000 per year may eventually receive $60,000 from Social Security. Their portfolio may need to provide considerably more before those benefits begin than it does afterward.
Spending can also change throughout retirement. Travel, healthcare, a new vehicle, or a home project can all change how much you need from your portfolio from one year to the next.
Consider: If you retired tomorrow, do you know how much you would need to withdraw from your portfolio during the first year and how that amount might change over time?
2. Where Should Your Retirement Income Come From?
Your retirement savings may be spread among traditional IRAs or 401(k)s, Roth accounts, taxable investments, and cash. Those dollars aren't necessarily interchangeable, as they likely have different tax treatments.
Where you take a withdrawal from can affect your current tax bill, future required minimum distributions, the taxation of Social Security benefits, and potentially Medicare premiums.
There isn't one withdrawal order that works for everyone. Deciding which account to use can also be an important part of your retirement income plan.
Consider: If you needed $10,000 for an unexpected expense in retirement, do you know which account you would take it from and what the tax consequences might be?
3. How Should Your Portfolio Change?
Retirement doesn't necessarily mean abandoning stocks and moving everything into bonds and cash. Your portfolio may still need to support decades of spending.
At the same time, money you'll need relatively soon generally has a different purpose than money you may not need for many years. Cash, interest, dividends, and bonds maturing in future years can potentially provide sources of liquidity during periods of market volatility.
Consider: If the stock market declined significantly during your first year of retirement, where would your next 12 months of portfolio withdrawals come from?
4. When Should You Take Social Security?
Social Security shouldn't necessarily be considered separately from your investments.
Claiming earlier may reduce the amount you need to withdraw from your portfolio today. Waiting generally results in a higher monthly benefit but may require greater portfolio withdrawals in the meantime.
Life expectancy, spousal benefits, other income, taxes, and personal preferences can all factor into the decision.
Consider: Have you decided when to claim Social Security based on how it fits into your overall retirement plan, or simply based on the age you expect to retire?
5. What Does Your Tax Picture Look Like After You Retire?
Retirement can change your tax situation considerably.
Someone who retires before beginning Social Security or required minimum distributions may have several years with lower taxable income. Depending on the circumstances, those years could provide opportunities to consider Roth conversions, realizing capital gains, or additional IRA distributions.
The goal isn't necessarily to minimize taxes in a single year, but to understand how today's decisions may affect taxes later in retirement.
Consider: Do you know what your taxable income might look like during your first few years of retirement and how it could change once Social Security and required minimum distributions begin?
The $2 Million Is Only the Starting Point
Your account balance alone doesn't determine whether you're ready to retire. How much you plan to spend, where your income will come from, how your investments are structured, and how taxes and Social Security fit into the picture all matter.
How many of these questions could you answer today?
If you're approaching retirement and aren't sure about some of your answers, our team at Aspen can help you work through them. Contact us to start a conversation about your retirement plan.
About Aspen Investment Management Inc.
Aspen Investment Management Inc. is a Grand Rapids, Michigan based investment management firm serving individuals and families throughout West Michigan and beyond. We specialize in retirement planning, investment management, tax aware financial planning, and helping clients navigate major financial transitions with clarity and confidence.
Important Disclosure
This article is intended for informational and educational purposes only and does not constitute personalized investment, tax, or legal advice. The information presented is general in nature and may not be applicable to your individual circumstances.
Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results, and no investment strategy can guarantee a profit or protect against loss in all market environments.
Before making any investment or financial planning decisions, investors should consider their own objectives, risk tolerance, time horizon, and financial circumstances. You should consult with your financial, tax, or legal advisor regarding your specific situation.
Advisory services are offered through Aspen Investment Management, an SEC registered investment adviser. Registration with the SEC does not imply a certain level of skill or training.
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