“How much do I need to retire?”
A question that is commonly asked by those nearing retirement. It’s also a question that many people don’t have any clue how to answer, and the answers that do come to mind often lack the nuance that is really necessary to answer such an important question. The thing is, you have to take in many factors including your age, retirement spending and goals, as well as macroeconomic factors like inflation which are nearly impossible to predict in the long run.
While it may seem difficult at this stage to predict your annual expenses 5, 10, 20 years from now, it can be estimated with some intentional retirement planning, which we share below.
To truly understand how much you need to retire, you’ll also need an idea of what kind of lifestyle you expect to enjoy in retirement—what you want to do and who you want to do it with.
But first, we need to address two common “retirement rules”—and why they shouldn’t be relied on when planning your retirement income and retirement savings.
What people really want to know is not only how much retirement savings they need to live on, but also how much they need to live out their dreams in retirement.
Why you shouldn’t rely on these 2 common “retirement rules”
1. The 80 percent rule.
This common rule says you should expect to live on at least 80 percent of your yearly salary per year after you retire.
For example, if your annual income is $60,000 while working, you should plan on spending around $48,000 per year after you retire.
While the 80 percent rule is a decent starting point, it doesn’t take into account one major reality: Your expenses typically increase up to 20% in the first several years of retirement.
Think about it.
After you retire and “every day is Saturday” it gives you a lot more free time—and that means more opportunities to spend as well, and often on credit cards. But you shouldn’t be afraid of spending.
After all, you’ve worked hard your whole life. You’ve saved and poured yourself into your family, your career, and your community. Retirement should be a time to enjoy what’s next, not a time to worry about finances or only go out on special occasions.
2. The 4 percent rule.
This retirement rule of thumb says that you should expect to withdraw 4 percent from your retirement accounts each year.
So if you have $1 million in your accounts, you would withdraw $40,000 each year.
The reason the “4% rule” falls short is that it expects you to have a 60/40 portfolio split of stocks and bonds, which assumes two things: 1) that a 60/40 stock combination is best for your needs and lifestyle, which for many it isn’t, and 2) that you will continually be rebalancing.
The 4 percent rule also doesn’t account for the future inflation rate or cost of living. Also, since life expectancies are longer today, people have 30+ years of retirement living to plan for.
Retirement should be a time to enjoy what’s next, not a time to worry about finances or only go out on special occasions.
Why tracking what you spend now is key
Instead of worrying about the uncertainty of the future, you can gain control by becoming more certain about your current spending—and that starts with a spending plan.
Yes, we do mean a budget. Something that tells you where your money is coming from and where it’s going.
Many people don’t have a current budget since they often feel they don’t need one. Their kids might be out of the house, and they feel they can live comfortably the way they want with their income. You might feel similar.
But when it comes to planning for retirement, it’s vital to understand exactly how much you’re spending today.
When you understand your current monthly expenses, you can add 10, 15, and 20 percent to get a better estimate of what your expenses might more realistically be after you retire.
Increasing your retirement income
The good news is there are strategic ways to increase your retirement income—thereby increasing the monthly income you can draw in your retirement years.
One of those ways is to increase your Social Security income by maximizing your Social Security benefits.
Another strategy is learning how to reduce your taxes in retirement. Doing a Roth Conversion is a powerful tool for this.
Ultimately, there isn’t just one answer to how much you need to retire. It’s not only about your current savings plan or the rate of return on your retirement accounts. Nor is there one set amount you need in your Roth IRA, traditional IRA, or other particular investment streams such as real estate or mutual funds. Those are all pieces of the puzzle, but not the whole picture.
While online retirement calculators can be a good tool to start with, they can’t factor in all the specifics of your situation or cover the complexities of the realities we’ve just touched on above.
That’s why talking with a real financial advisor is beneficial. To get your questions answered, you can schedule a meeting with one of our financial advisors.
