How Much Do I Need to Retire?

The Importance of Income

As you plan for retirement, take a closer look at other passive income streams, such as Social Security, 401(k) plans/accounts, and pensions. Contrary to popular belief, relying on your savings isn’t the only important factor in retirement.

It’s equally important to calculate your current spending pre-retirement and the type of lifestyle you aim to live during retirement. On average, you should look into saving at least 10 percent of your income (and possibly more) for your retirement, no matter your age. Additionally, you should calculate the current expenses in your present lifestyle and anticipate taxes and other medical or travel expenses not accounted for in retirement.

Once Social Security income kicks in, it can ultimately serve as an important chunk of your retirement income (at least 40 percent of pre-retirement income on average). In terms of precise calculations, there are many online “retirement calculator” resources that provide an overview of whether you will have enough income streams to retire comfortably.

This calculation gives you a healthy estimate of whether you need to set aside more money toward traveling or medical expenses during retirement, for example. Or, you can deduct certain expenses that you don’t anticipate having once you’re retired (e.g., mortgage, life insurance or costly auto insurance plans).

Should I Save or Invest?

According to research, one in three Americans has less than $5,000 in retirement savings. So, how much should you typically save or invest for retirement? That answer varies based on your unique situation.

While saving for retirement is important, it’s also equally important to make smart investment decisions and focus on earning income that can be set aside for retirement. In addition to saving, it’s important to invest because you can potentially get a high rate of return.

Examples of investments can be high-yield savings accounts to grow your money passively, certificates of deposit which are considered the safer investment option, money market accounts, or other investment options to grow your money. For example, when you choose to invest in an FDIC-insured institution with a higher annual percentage yield, you’ll get a safer return on your money. However, there are also some potential downsides to investing as well.

Not all investments are safe or created equally. There are also high-risk investments such as dividend-paying stocks, where companies pay dividends to shareholders. It can be a tempting investment for adults who are looking for a more steady income. However, it’s not always the safe option since there’s no guarantee of a risk-free return investment. For instance, the company could undergo a significant change or eliminate its dividends.

The Four Percent Rule

The Four Percent Rule is a general consensus about how much an individual should consider withdrawing from their retirement accounts annually. In general, the retiring person would have a consistent source of income all throughout retirement, with an average safety net or withdrawal rate of four percent. (This rate is based on historic market data.) You should consider withdrawing funds around that rate to avoid depleting your funds or overspending during retirement. You can use the Four Percent Rule to ensure a steady income and to prevent depleting your savings.

While some of the pros of this rule include a steady income and accountability, there are also downsides, too. For example, the rule could be outdated and, therefore, not applicable to how the given market is currently operating or performing. Also, it doesn’t account for sudden emergency expenses such as travel or medical costs that might result in withdrawing funds of more than four percent a year. Given the current economy and high cost of living, the Four Percent Rule may not apply or give the peace of mind or reassurance it once did.

For example, Schwab offers a hypothetical situation where you would apply the Four Percent Rule. A good way to practice this rule, according to Schwab, is by adding your investments and withdrawing the first four percent when you initially retire. Of course, it’s important to also consider emergency expenses and market changes (dental, medical, travel) when you withdraw future funds.

Amount of Money Needed to Retire

Many retirement experts project that you need somewhere between 80-90 percent of your pre-retirement income to sustain your retirement lifestyle. For many, this can equate to roughly $1 million, which seems like a tricky number to achieve. The problem with this percentage is that it doesn’t account for the fact that some people might not have pensions or other sources of passive income coming through to support their retirement lifestyle.

The amount of money needed to retire also varies from person to person. For instance, one retired individual might live on a frugal budget while another might have expensive tastes with certain hobbies and more travel expenses. Other factors may include a person’s health status, life expectancy or current spending habits.

The amount of money needed to retire also comes down to personal preference and how comfortable a retiree is when it comes to paying expenses or saving. Ben Storey, Bank of America’s Retirement of Thought Leadership director, told Merrill Edge: “Because there are so many variables, even the retirement researchers can’t agree on a total dollar amount … What each person needs will vary widely based on a number of factors.”

How to Begin Planning Your Retirement

Thinking of planning your retirement but don’t know where to start? Take it one step at a time, with actionable and attainable goals. In the following section, I’ll discuss important aspects such as budgeting, planning future expenses, figuring out the age at which you would like to retire, and determining your spending and investment returns.

Understand Your Time Frame

When planning for retirement, it’s important to strategize and look at your time frame and current investments. If retirement is far away, it’s a good idea to look into riskier investments and then transition into safer investments as you near retirement age. Also, it is important to factor in inflation, which can have an impact on your savings and investments when you retire.

If you’re not a habitual saver, it’s time to start making tiny steps toward saving. You should also consider diversifying your investments portfolio so that you don’t put all your eggs in one basket. As you get older, look for safer investment options with higher returns that help preserve your income instead of depleting it with high risks. Consider bonds instead of stocks or high-risk investments.

For instance, a 67-year-old retiree who’s closely guarding his savings account has a completely different mindset than a 25-year-old, who’s not actively thinking about retiring and spending their money on coffee every day. And for those who are planning to retire and move out of state, it’s even more important to create a concrete plan and break it down into actionable goals.

Here’s a scenario: You’re an individual that is ready to retire to California in five years, but you have the responsibility of helping your child live rent-free until they are ready to move out at 21. You cover additional expenses for them such as their phone bill, car insurance, utilities, and groceries. In terms of drafting a retirement plan, you can plan different milestone years such as the next five years, which includes covering your child’s expenses in addition to your personal expenses.

Post-five years, you enter retirement in another state and that means you must accommodate different state regulations/home and rental prices, as well as use this time to diversify your portfolio and adjust to another state — both health and financial-wise. You can also focus on drafting and listing expenses that you don’t have to worry about (covering for your child’s expenses), for instance.

Determine Your Spending During Retirement

It’s assumed that your retirement spending might not exceed your daily expenses pre-retirement. However, you should account for other expenses that you might not have incurred when you had a job. For instance, it’s important to keep track of your spending needs and set proactive and realistic financial expectations.

Retirees may tend to spend more on medical or travel expenses within the first years of retirement, though this may differ for every person. For example, a retiree may still have a mortgage to pay off in addition to homeowner’s insurance and family care costs, which could increase their spending during retirement.

With the cost of living dramatically increasing, you’ll have to consider unexpected or out-of-pocket expenses that you may need to add to your list. It’s a good idea to estimate and figure out how much you plan to spend on a weekly, monthly, and annual basis during your retirement and figure out what types of investments and savings you have to accommodate that. You can take a look at your current monthly income and estimate approximate expenses and savings during retirement to give you a ballpark figure. There are also plenty of resources online, such as retirement calculators or even spreadsheets that help you create realistic budgets and expectations.

Figure Out Your Investment Returns

It’s important to remember that investments are contingent on several criteria such as the rate of return, inflation rate, taxes, and your personal time frame, according to AARP.

For instance, if you put in an original investment of $50,000 to start off and an annual investment of $1,000, your investment could be worth approximately $335,985 in the span of 20 years. But this figure is an estimate assuming that your annual rate of return is at nine percent with an estimated inflation rate of three percent. Take into consideration that investment returns are taxed and are only able to be estimated, so it’s helpful to figure out the taxes and approximate rate of return calculations for when you plan to retire.

Figuring out your investment returns in advance can help you better prepare and consider possible scenarios to help you reach your investment goals. As a tip, it’s also better to start retirement planning earlier so you can passively grow your retirement portfolio at a rate that offers better security.

Plan Your Estate

Estate planning is an integral part of retirement planning, as it helps you decide what will happen to all of your assets when you pass on. You can start planning your estate by taking a closer look at the various assets that you possess. This can include everything from investments, savings accounts, life insurance, and 401(k)s, to larger purchases such as homes, vehicles, or priceless family heirlooms.

I recommend you start planning your estate by working with elder law professionals that can best advise on matters relating to your estate. While planning your estate, it’s also equally important to figure out the impact of taxes when it comes to providing certain financial gifts to your loved ones. If there’s any gray area, it’s important to list those and speak with financial or legal experts to better assist with your estate planning.

Since planning your estate can be a complicated or lengthy legal process, it’s best to start early and incorporate this in your retirement planning as well. Consider focusing on important aspects like the power of attorney, trusts, and a will –– a legally binding document that determines what will happen to your assets after you die.

For more resources on how to plan your estate, check out my guide on how to plan your estate.

The Bottom Line

Planning for retirement and figuring out your expected income can be a helpful start in the right direction. Whether you’re hoping to set aside more for your retirement or hoping to adjust and downsize to accommodate other expenses — you’ll be better off figuring out anticipated costs by planning early.