The concept of saving for retirement is nothing new. Practically from day one of our first jobs, a little voice tells us that we should invest some of the money we’re earning now for retirement. That part is clear. How we use that investment portfolio when we get there isn’t so apparent. Let’s demystify the process.

The story we play in our heads looks familiar. 

You’ve reached retirement age. After staying up all night partying in celebration, you embark on life’s next saga. 

In the years leading up to this day, your dreams fueled your planning. 

Perhaps those plans involve endless traveling. Maybe you’re ready to go live a simpler life somewhere warm. 

Whatever it is, you’re ready to spend more time doing you.

However, when you’re not out making memories, you still need to eat, sleep, and take care of yourself (and your loved one(s)). 

All of these things (inconveniently) cost money.  If that wasn’t enough, you have no idea how long you’ll live, throwing massive uncertainty into your thought process.

Suddenly, your uplifting aspirations give way to mild trepidation. As the cortisol rises in your brain, you distract yourself from the here and now. Whatever answers you might need, you’ll deal with it later, hoping to figure it out another day. 

We’ve all been there.

Thankfully, though, it doesn’t have to be that way. With a bit of understanding, we can keep the stress down and our retirement enthusiasm up. 

Key Takeaways

• The money you save and grow will generate income for you during retirement
• Your base amount should stay the same, with the interest you earn acting as your income.
• You generally keep the base amount instead of taking from it each year until it’s gone; otherwise, you run the risk of outliving your money.  

Breaking down your financial picture

Let’s assume that throughout your career, you were able to save and invest for your retirement.  You also own a bit of real estate and have some state-run pension payments coming your way. 

Savings and investing

Since you worked with a financial advisor, you were able to get the most return for your money while prudently managing investment related-risks. 

Between your partner and you, the balance of your investment account is now worth 1,600,000 EUR (well done!). 

The flat in Spain you bought when you were younger

When you were in your thirties, you purchased an apartment in Barcelona, as both a place to live and as a long term investment. You were living there at the time, and it seemed like a logical choice. 

Even though it cost you a bit more than you thought (real estate is complicated like that), it’s all yours. You can either rent it for 1,200 EUR per month or sell it. 

You recently spoke with a local real estate agent, and she told you that you could probably get 400,000 EUR for the apartment, after taxes, if you sold it. 

Your social security 

Throughout your career, you worked in a few different countries. As a result, you contributed to a few state pension systems. 

While it took you a few phone calls and working with various bureaucracies, you know that you’re entitled to: 

• 300 EUR a month from Spain
• 450 EUR a month from Belgium
• 850 EUR a month from the Netherlands   

In total, that’s 1,600 EUR a month in social security pension.

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The portfolio problem and the magic 4%

So far, we know how much you’ll receive for two-thirds of your income sources. Between the rental income and social security, you’ll get 2,800 EUR a month. 

But what about that 1,600,000 EUR investment portfolio? While it’s undoubtedly cool that you’re a millionaire, you didn’t make all that sacrifice just for bragging rights.

 How does that number factor into your retirement?

When we invest in our retirement, we generally want to grow our money as much as possible. We do so by selecting funds that invest in stocks and bonds. 

Stocks and bonds pay income in the form of dividends and coupons. If we want to grow our portfolio, we take this income and reinvest it into our funds. 

That way, the fund’s value increases, generating more profit. As the cycle repeats, the returns grow exponentially. 

While there is a considerable amount of risk in this strategy, we know that over the long-run, we can absorb these losses and still meaningfully grow our portfolios. 

When we hit retirement, though, our investment priorities change. Instead of aggressively growing our accounts, we want to protect its value and generate income.  

Here’s how that works. 

First, we adjust the types of investments we hold to reduce risks.  By bringing down the risk level, we can preserve the portfolio’s value. 

Second, in place of reinvesting the income to grow the fund, we use it for our daily expenditures. 

In the financial planning world, we target somewhere between 3-4% annual return for a retirement portfolio.   

We accept this level as a safe compromise between risk and performance. 

Under the 4% rule, an investment portfolio of 300,000 EUR creates 1,000 EUR a month of income. 

At the end of the year, the portfolio will still have its initial value of 300,000 EUR, meaning that the cycle can safely repeat itself.  

Let’s take your 1,600,000 EUR worth of investments and break down the concept a bit further. 

4% of 1,600,000 EUR is  64,000 EUR. 

64,000 EUR divided by 12 (for each month of the year), is 5,333.30 EUR. 

In other words, a portfolio worth 1.6 million euros creates 5,300 EUR per month of income, before tax. 

With your apartment in Barcelona and your social security pension, you’ll get 8,100 EUR a month, before taxes, all for you to continue living your life. 

Not. Bad. Right? 

We think so, and in reality, this is how investments work for you when you’re ready to stop working. 

Of course, there are a lot more variables at play.

 Taxes can get tricky quickly.  

The transition between higher-risk investing and safer, income-generation is not always clear.  

Further, even finding the right strategy for yourself requires deep reflection and hours of often contradictory research.  

If you’re living abroad, managing all of these aspects gets even more perplexing. 

Whatever your situation, it’s probably worth your time and money to speak to a financial professional who can help you get to where you need to be.  

In any case, now you know how your investments work for you in retirement.  Knowing that will keep you dreaming of retirement without the nightmare of not knowing how you’ll afford it.  

We at abroaden are helping people abroad around the world find the best way to invest and manage their money regardless of where they are on the globe. 

Abroaden is a company for expats, digital nomads and other world citizens looking for low-cost and transparent financial advice and investment management.

Note that this article is for information and educational purposes only. It does not constitute financial advice.