“How Much Will I Need to Retire?”
When it comes to retirement planning, it’s my quest to help people realize their retirement goals. Often, when people come to see me, they are looking for a specific outcome from my financial planning. They want to know that they have amassed enough savings and IRA or 401K assets to enjoy the retirement they’ve dreamed of. For those that are nearing retirement, I’ve already answered the question, “How do you know when you’re ready to retire?” (See the Video)
Yet, for those not quite on the brink of retirement, you may have questions as you work towards retiring and are still in the accumulation phase. How much do you need? It’s not a simple answer but is based upon a number of factors. I’ve created retirement income plans that range from modest retirement accounts of a little less than $100,000 all the way up to multi-million dollar estates. Many factors determine how much is needed to retire, so the final figure can vary greatly. In addition, the planning and management of the portfolio can often be more important than the actual accumulated savings.
With that in mind, I wanted to pass on some hypothetical retirement scenarios, not to scare you, but perhaps to inspire you toward creating a nest egg to help you achieve more towards retirement.
How much have you saved for retirement?
Are you on pace to amass a retirement fund of $1 million by age 65? More than a few retirement counselors urge pre-retirees to strive for that goal. If you have $1 million in invested assets when you retire, you can withdraw 4% a year from your retirement funds and receive $40,000 in annual income to go along with Social Security benefits. If your investment portfolio is properly diversified, you may be able to do this for an extended period of time without delving into assets elsewhere.1
Perhaps you are 20-25 years away from retiring. Factoring in inflation and medical costs, maybe you would prefer $80,000 in annual income plus Social Security at the time you retire. Strictly adhering to the 4% rule, you will need to save $2 million in retirement funds to satisfy that preference.1
There are many variables in retirement planning, but there are also two realities that are hard to dismiss. One, retiring with $1 million in invested assets may have sufficed in 2018, but not in the 2030s or 2040s, given how inflation whittles away purchasing power over time. Two, most Americans are saving too little for retirement: about 5% of their pay, according to research from the Federal Reserve Bank of St. Louis. Fifteen percent is a better goal.1
Fifteen percent? Really? Yes. Imagine a 30-year-old earning $40,000 annually who starts saving for retirement. She gets 3.8% raises each year until age 67; let's estimate her investment portfolio earns 6% a year during that time frame. At a 5% savings rate, she would have close to $424,000 in her retirement account 37 years later; at a 15% savings rate, she would have about $1.3 million by age 67. From boosting her savings rate 10%, she ends up with three times as much in retirement assets.1
Now, what if you save too little for retirement?
That implies some degree of compromise to your lifestyle, your dreams, or both. You may have seen your parents, grandparents, or neighbors make such compromises.
There is the 75-year-old who takes any job he can, no matter how unsatisfying or awkward, because he realizes he is within a few years of outliving his money. There is the small business owner entering her sixties with little or no savings (and no exit strategy) who doggedly resolves to work until she dies.
Perhaps you have seen the widow in her seventies who moves in with her son and his spouse out of financial desperation, exhibiting early signs of dementia and receiving only minimal Social Security benefits. Or the healthy and active couple in their sixties who retire years before their savings really allow, and who are chagrined to learn that their only solid hope of funding their retirement comes down to selling the home they have always loved and moving to a cheaper and less cosmopolitan area or a tiny condominium.
When you think of retirement, you probably do not think of “just getting by.”
That is no one’s retirement dream. Sadly, that risks becoming a reality for those who save too little for the future. Talk to a financial professional about what you have in mind for retirement: what you want your life to look like, what your living expenses could be like. From that conversation, you might get a glimpse of just how much you should be saving today for tomorrow.
Krista McBeath is an Investment Advisor, Chartered Financial Consultant, a Licensed Insurance Advisor, a Fiduciary, and an experienced tax advisor who specializes in financial planning, investments, and insurance. She utilizes advanced tools for in-depth calculations that analyze tax and retirement scenarios to help her clients avoid a future tax time-bomb. Whether this means enjoying more of your hard-earned money in retirement or passing along assets to loved ones with less tax burden, planning makes the difference.
Her Amazon best-selling book, The Generational Wealth System outlines a holistic approach to preserving lifestyle, wealth and legacy.
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