A question that lurks in everyone’s mind is, “How much money do I need to retire?” While it’s a simple question, the answer is anything but that. Unfortunately, there is no magic number or one-size-fits-all solution. Everyone’s number will vary due to a multitude of factors. So, while one person might need $2 million to retire, another may only require $750,000.
Working with a financial advisor is generally the best way to ensure you don’t outlive your money in retirement. But several methodologies can help you determine a ballpark figure to assist with planning.
The following guide will reveal ways to estimate your retirement number and identify crucial factors often overlooked by future retirees.
There are a variety of methods when it comes to estimating your retirement number. Each has its own set of flaws, but they’re good starting points if you’re looking for a general range. Here are basic overviews of four common rules of thumb:
For example, assume your salary is $100,000 prior to retirement. Your retirement number would be between $1 million – $1.2 million.
For example, if your pre-retirement income is $100,000, you need a retirement plan that distributes between $80,000 – $90,000 annually.
It’s a popular rule because it can work effectively. However, it also has several flaws. For example, it assumes your portfolio will be made up of 50% stocks / 50% bonds.
Here’s an example to illustrate how the 4% rule functions. Imagine you retire with $1 million in savings. The first year, you could withdraw $40,000. If inflation increases by 3% next year, you will withdraw 4% plus 3% of that amount for inflation ($40,000 + $1,200 = $41,200).
BONUS: You can also use the 4% rule in conjunction with other methods. For example, assume you determine you need $80,000 annually in retirement (from the 80% – 90% of Pre-Retirement Income method). Since that figure is 4% of your total retirement number, you can multiply the $80,000 by 25 to determine how much you will need to save.
For example: $80,000 x 25 = $2,000,000 | $2,000,000 x 4% = $80,000 / year
When you begin plugging in numbers, the high-dollar amounts can make anyone’s heart start racing. These aren’t small figures, and the thought of saving that much money can make people panic.
But before you start watching reruns of “Extreme Cheapskates” and searching the couch cushions for change, know these figures can be misleading. They rarely paint the whole picture, and your retirement number might be significantly less.
Here are two crucial items to consider:
With the absence of these costs, your retirement number could decrease significantly.
To build off the example from earlier (and to provide peace of mind), the following will illustrate the significant role Social Security plays in your retirement plan.
Earlier, you determined you need to receive $80,000 annually to live comfortably in retirement.
Now, assume you and your spouse each receive $1,750 in monthly Social Security benefits.
$1,750 x 2 = $3,500 per month | $3,500 x 12 = $42,000 annually
If you earn $42,000 in Social Security benefits each year, you will need a retirement plan that will give you $38,000 each year.
$80,000 (Annual Retirement Goal) – $42,000 (Social Security Benefits) = $38,000
Using the 4% Rule, you can multiply $38,000 x 25 to determine your retirement number.
$38,000 x 25 = $950,000 (Your Estimated Retirement Number)
You can see that $950,000 is significantly less than the $2 million originally estimated. And this figure still doesn’t include any pensions you may receive or other items like future inheritances. It’s important to note that this estimate also does not include taxes, which will definitely come into play.
Between retirement rules of thumb and online calculators, you’ll be able to estimate your retirement number. But nothing will compare with the service a financial advisor can bring. They’ll be able to plug in your information and generate outcomes based on a multitude of scenarios.
Many variables that will come into play include:
Retirement planning can often feel overwhelming. Too often, people compare themselves to others and become discouraged. But there is no one-size-fits-all solution, so seeking guidance is essential.
If you’re interested in learning more about retirement planning or want a second opinion on your existing plan, we’re here to help. Please contact our Wealth Management Team.