How happy retirees can spend $82,770 a year without having millions in the bank

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Retirees relaxing on the beach
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Retirement can be a a joyous time. Freedom abounds; you get to choose how you spend your days. For some people, a comfortable post-career life is quiet, with lots of time to spend with the grandkids and twice-yearly vacations. For others, retiring means jet-setting around the globe, building a second home at the beach or in the mountains, or even starting a small business.

Most of us fall somewhere in the middle on the frugal-to-extravagant spectrum when it comes to how we envision our retired years. So how much of a nest egg and annual income do we need to make our retirement dreams come true?

What is the ‘Magic Number’ for retirement spending?

My research on what makes happy retirees tick uncovered a magic number (of sorts) for contentment in this next phase of life – $82,770. This amount is the average annual household income for happiest retired couples I surveyed.

Of course, everyone’s individual needs will be, well, individual. So, for your retirement, you may need less or want more spending money to find your happy place. So for illustration purposes, let’s see what it takes to actually net $82,770 in a given year. To make the numbers easier to remember, let’s use the round number of $100,000 in gross income, and apply a reasonable tax estimate for retirees, in this case 17.23%.  ($100k X 17.23% = $82,770).

Commentators on financial freedom during retirement are quick to say that everyone needs about $2.2 million stashed away to have a good retirement. But I have seen folks live rich, fulfilling post-job lives on far less.

The first component to remember is that your investments probably won’t be your sole source of income after you stop working. Think about it. Depending on your age when you bid adieu to the 9-to-5 world, you may be eligible for Social Security benefits or draw from a pension. You may decide to try some part-time work. You could be receiving rental income on another house (or other houses) you own. There are plenty of possibilities for how you’ll supplement your retirement nest egg once the time comes.

Let’s explore each of these potential income streams in more detail, and then talk about investment income.

Social Security (“SS”)

Under the current rules, you can start receiving SS benefits when you are 62. But, remember, for every year you wait up to age 70, you’ll get a higher monthly benefit.

I know what you’re thinking: “Will Social Security even be around when I retire?” My answer is “probably,” especially if you are currently in your late 50s or early 60s. If you’re just starting your career, however, it never hurts to plan for a retirement without accounting for a monthly SS check. You’ll just have more savings when the time comes for you to call it a career.

Pension

For those lucky few who still earn a pension – folks like teachers and government workers, for example – remember to factor this amount into your monthly income calculations.

Part-Time Work

Consider taking on a part-time job to generate some additional income (and for the added benefit of making some new friends).

Make sure you choose a side gig on your own terms. It should entail work you enjoy with hours that allow you to live out your retirement dreams, and, ideally, connect you with a passion. If golf is your thing, get a job as a starter or tournament marshal. Love clothes and fashion? Put in a few hours per week at a boutique.

And let’s not forget that working part-time offers the bonus of human interaction and the chance to expand your social circle, both of which are good for your health!

Rental Income

If you decide (and can afford) to buy a new house without selling your current home, consider renting the old place. This is a great idea for folks planning to downsize in retirement. Think about it this way: If the rent is more than your monthly mortgage payment, taxes, upkeep, etc., you will generate extra monthly income. Additionally, your tenant is footing the bill as your house (hopefully) appreciates and you build equity.

Investment Income

And so we arrive at the central piece of our income puzzle.

My favorite rule of thumb is that for every $250,000 you save, you’ll generate about $1,000 per month in income. Things like dividends on stocks, interest on bonds and distributions from such alternative investments as REIT’s (Real Estate Investment Trusts) or MLPs (Master Limited Partnerships) kick off the income. Under this scenario, the idea is to leave our principal intact. You can read more about my method of income investing here.

Now, let’s put it all together to see exactly what it will take to get you and your spouse to that $82,770 annual income level.

To net this amount, you’ll need to generate around $100,000 of total gross income. Consider this example of annual income:

$24,000 – SS Spouse 1 ($2,000/month)
$18,000 – SS Spouse 2 ($1,500/month)
$8,000 – Annual Pension ($666.66/month)
$12,000 – Part-Time Work ($1,000/month)
$ 0 – No rental income
$38,000 – Investment Income ($3,166.66/month)
Total = $100,000

Here, we get to $100,000. If we assume a tax rate of 17.22% (as we all know, taxes vary for everyone), it brings us down to that happy retiree average of $82,770 net for the year.

Notice that for our example couple to fill the gap, they needed $38,000 per year in income from their investments. To generate this level of income (based on our general rule), you’d need about $950,000 to withdraw the 4% per year of investment income. That’s less than half of that $2.2 million we talked about before! And, it’s a number that’s attainable for most anyone with a bit of discipline and determination – especially if you start early.

True, $950,000 is still quite a bit of money, but it’s worth every sacrifice if it funds the retirement of your dreams, however that looks. And, heck, next to $2.2 million, it’s a bargain!

Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

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Wes Moss About the author:
Wes Moss is the host of Money Matters – one of the country’s longest running live call-in, investment and personal finance radio show – on WSB radio. He is the Chief Investment Strategist at Capital Investment Advisors (CIA), and a partner at Wela, a digital financial advisory service. In 2017, Barron's named Wes ...Read more
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