When planning for retirement, it’s useful to distinguish between wealth (your assets minus your liabilities) and income (the cash flow you receive). Both are important, but they serve different purposes. This month we’ll take a closer look at both of these concepts.
A common example should clarify the difference between wealth and income. Consider your home. It’s probably worth several hundred thousand dollars or more, but for many of us, this asset remains locked up so that we have a place to live. This is wealth. Income on the other hand, is access to money that we can use to pay our bills and enjoy life. Here’s a handy comparison of the two concepts.
At first blush, it may seem logical that wealthy people have high incomes – and many do. But, high income does not automatically translate into wealth. One classic example of this is a doctor who earned a very high salary, but didn’t save much because of his student debt, extravagant life style and other factors. Conversely, an office worker with a modest salary might have socked away 15% of her salary each year over her entire career. At retirement, she’d have high wealth even though her income had been low during her working years.
Finally, here’s a specific example of wealth versus income in retirement. Suppose you have retirement savings of $1,000,000. In this simplified example, a million dollars (plus your home equity) represents your wealth. If you choose to withdraw 4% per year, this wealth would generate $40,000 per year in income. If that is combined with say $30,000 in Social Security and a $20,000 pension, your retirement income would be $40,000 + $30,000 + $20,000 = $90,000 per year.
Planning for a desired retirement income has many factors such as how much to save each year, how much to spend in retirement and much more. If you’d like some help thinking about all of this, or any other financial matters, we’d be happy to get together in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.