The theme this week on the One Minute Retirement Tip podcast is: setting your retirement budget. 

Today, I’m talking about understanding the income side of your budget, which is money coming in.Yesterday we talked about accounting for the fixed and more reliable line items of your retirement income. 

Today, I’m covering the more variable and harder to set up portion of your retirement income, which is the income that can be generated from your portfolio. This can take the form of dividends, interest, selling investments for portfolio withdrawals or a combination of all 3. 

How do you figure out how much you can withdraw from your portfolio each year to provide for your needs and the lifestyle you desire in retirement without running out of money? That’s one of the hardest questions to answer in personal finance and it’s an impossible one to answer for most people. 

Because you can always run out of money in retirement, but you’re less likely to if you follow a few guidelines. One that you may have heard of that I’ve talked about many times on the podcast is the 4% rule. In most cases, if you can keep your portfolio withdrawals to 4% or less of your portfolio, it’s unlikely that you’ll run out of money.

The 4% rule is deeply flawed - it’s based on a number of assumptions that don’t reflect reality for most people, but it is very useful in that it’s a great place to start, at least for creating your initial retirement budget. 

I recommend a monte carlo analysis which will live your retirement 1000 different times and provide a better estimate of your sustainable withdrawal rate in retirement...most financial planners and advisors can do this for you. We do it all the time with our clients and it provides a lot of clarity to the income that your portfolio can generate for you reliably in retirement. 

For the sake of figuring out your income for your budget, let’s use the 4% rule as a starting place. If you have a portfolio of $1 million, and you withdraw 4% of your portfolio value in year one of retirement, that’s $40,000 of income. It’s not perfect, but it’s a reasonably accurate starting point. 

Now, you just need to add up all of your income sources that I covered yesterday, include the portfolio withdrawals and you’re all done with the income side of the budget for year one of retirement. 

Tomorrow, things are getting a little more interesting...We’re moving over to the expense side of the budget to look at your spending, now that we’ve taken inventory of all of your income sources. We’ll talk about taxes too, which many people forget to include. 

Just a quick reminder, all this week if you email me, I’ll send you my favorite worksheet to use for creating your retirement income and spending budget. Just email me at [email protected]. And I’ll send you the worksheet to help make your budgeting easier. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance