Once the “income gap” has been determined, the next step is to determine if your accumulated or projected assets are adequate to fill this gap. The goal is to determine the amount of annual living expenses that must be covered by your investable assets such as individual retirement accounts (IRAs), savings, and personal investments.
When this goal amount is divided by the size of your investable asset portfolio, the result is the rate of return you need to achieve. For example, if a person’s retirement income needs are $40,000 per year and they receive $20,000 in social security benefits, then their income gap is $20,000.
$40,000 income needs for year
– $20,000 social security benefits
= $20,000 income gap
Assume they have a total investment portfolio of $500,000 that consists of an IRA, certificates of deposit (CDs), savings, as well as some personal investments. Their portfolio will need to return 4% per year to match their annual need.
$20,000 income gap/$500,000 investment portfolio = 4% annual target rate of return
How Long Retirement Assets Will Last
The possibility of outliving your assets may be a very real concern. How long your retirement assets will last depends on a number of factors, including the amount you spend, your life span, and the return on your investments.
We welcome the opportunity to meet with you for a complimentary review of your goals to make sure you are on the best road for your retirement journey. We invite you to schedule a meeting with one of our experienced financial planning experts by calling 1-800-899-8858 or visiting us online at HillsBankWealthManagement.com.
Please visit our blog, HillsHelps.com, next Wednesday for part 3 of our 3 part series, “Financial Planning: How Much Will I Need to Save?” You’ll learn how long your retirement assets will last.
View the complete 3-Part Financial Planning for Retirement Series:
- Part 1—Financial Planning for Retirement: Social Security and the Income Gap
- Part 2—Financial Planning for Retirement: How Much Can I Spend?
- Part 3—Financial Planning for Retirement: How Much Will I Need to Save?