How much money do you need to retire?

We’ve all seen the commercials asking, “what’s your number?” The commercials are referring to the amount of money you’ll need throughout your retirement.

A recent survey by TD Ameritrade said that one in six baby boomers surveyed believe they’ll need $1 million to retire. The study also revealed that a majority of those surveyed have saved only a quarter of that amount to-date.

So, how much do you need?

Honestly, it’s not about your number. It’s about how much income you need in retirement to live comfortably and do the things that you’re passionate about. If you plan to buy a private island, you’ll need much more, but if you’re like most Americans, you’re more focused on maintaining your current lifestyle, having disposable income to travel, securing a financial legacy for your children and grandchildren, etc.

So where do you find your income in retirement? Most likely the income you draw in retirement will come from a number of sources. You’ll have social security benefits and maybe even a pension. The likelihood of social security and a pension covering your income needs in retirement is slim. This means that you’re left with the shortfall situation where you have a gap between your desired income and your actual income. If you’ve heeded sound financial advice, you’ve likely planned for this gap by investment planning.

How do you use the investments you have accumulated to maximize your retirement income? First, let’s classify the money in your investment accounts as one of two types: above ground and below ground. Below Ground Investments are defined as money that provides principal guarantees and volatility free investing. Above Ground Investments are defined as investments that expose you to market volatility but have long-term potential for higher returns on investments. Above Ground Investments and Below Ground Money can be easily related to the structure of a tree. There are two main parts to a tree, what you see above the ground and what you do not see below the ground. The roots, what lives below the ground are the strength and support of the tree itself. They provide nourishment, balance and stability to the tree. The tree, which is above the ground, is fully exposed to each and every element that nature can throw at it. In spite of these dangers, the tree is free to grow and may even produce some fruit.

How and when you use below ground money and above ground investments is critical to preserving your income in retirement. Below ground money is “live on” money. Below ground money can come from such accounts like fixed annuities, CDs, bonds, government-issued securities, and money market accounts? These are accounts that provide you with guaranteed income in retirement. Above ground investments are “leave alone” investments and can come forms like mutual funds, commodities, real estate, stocks, and bonds. Again, above ground investments should be entered into for their long-term rate of return potential.

Which would you rather “live on” in your retirement? Income you can count on that can’t run out, or income that may be variable and might run out? These are great questions that you should talk about with your financial planner.