How much do I need to retire? is a perennial question, and a loaded question. It’s a valid question, and it is definitely a number you should noodle over. However, there are a lot of variables that will greatly affect this number. There are several factors to consider when trying to figure out this goal. Let’s dive in!
First of all, if you Google this question you are going to find a myriad of answers. You’ll find standard rule of thumb responses like, 80% of previous income, or X times your annual salary at age Y, and some bold proclamations such as $500,000 minimum, or $2 million for $80,000 per year income. These responses can be scary, affirming, or just confusing if you don’t parse the advice and dig deeper to understand how it applies to your personal situation.
Keep in mind, several of these rules of thumb were crafted based on a late, twentieth-century concept of retirement. Things are changing fast. Just two factors to keep in mind. One, it was always assumed retirees would spend less, not more, in retirement. Two, people are living much longer these days. Just these two very basic factors have had a tremendous impact on the How much do I need? question. Basically, you need more!
Let’s take the generic 80% guidance. This rule assumes that if you want to have at least 80% of your current salary, you need to divide that number by 4% (incorporating the 4% portfolio distribution rule) which will give you the total portfolio needed to live on. This also assumes that your portfolio will earn at least 5% per year. Whew! That’s a lot of assumptions. Oh, and did I mention that it excludes Social Security? To keep the math simple, assume you earn $100,000 pre-retirement. You would want to target $80,000 post-retirement. This would require ($80,000 / 0.04) $2 million dollars.
What about the X times annual salary at age Y? Most of us already know to save at minimum 15% of our annual gross salary. These days, many advisers are recommending that be pushed to 20% or more. If you go by age, the old rule of thumb claims you need to have the following:
Age 30 – 1 x annual salary
Age 40 – 2 x annual salary
Age 50 – 4 x annual salary
Age 60 – 6 x annual salary
As you can see, this is a very subjective and somewhat unwieldy system to rely on. What if you change careers at say age 45 and your pay skyrockets? Your new target savings also needs to dramatically increase. Conversely, if you reach age 50 and find yourself out of work, out of luck, and taking any low-paying job you can find to survive doesn’t alleviate the need to save more. It exacerbates your situation.
So, what does one do? You can use the rules of thumb, but be sure you understand the moving parts and underlying assumptions. Here are a few things to keep in mind.
Aim to save – and invest – as much as you can during your working years; especially your younger years. Time and compounding are your best friends. More importantly, if you do move up in your career or change fields, don’t adjust your spending up to meet a new lifestyle. Sock away that extra money into investments for your future lifestyle.
It might be obvious, but invest! Don’t just sit in cash; invest that extra savings and income as early in life as you can. You need to understand how to invest and what your risk tolerance is. Generally speaking, you can hold much more in equities while you are younger, and temper this with a higher percentage of fixed income when you are older. Use low-cost funds to capture broad diversification in the market, and avoid the risk inherent in single company stocks or the latest investing mania.
If you have tried some calculators, rules of thumb, or other advice and feel you are behind, don’t give up! Any extra saved and invested will help improve your future.
Don’t discount Social Security. Politicians love fear mongering and making us think it’s going away tomorrow. Others tell us payouts may be reduced. That’s not what history shows us. Social Security has been our only stable leg of the retirement stool in the absence of pensions. When to claim is a whole other discussion and post. But let’s say, the later the better but try to hold off until at least full retirement age (FRA). Once you reach FRA, options open up such as being able to earn income without a reduction in benefit, and the possibility of a younger spouse being able to claim.
Other issues that factor into how much you will need include whether you will work part-time or do some consulting. Do you have a mortgage? Are you planning for one retiree or two? Is there an inheritance in the picture? Will your company provide some form of retiree benefit such as healthcare? Are you going to live in the US or abroad? As you can see, it’s not just a specific number. There are a lot of factors that affect the amount you personally need and your own comfortable number.
As an independent CERTIFIED FINANCIAL PLANNER™, I can help you plan for retirement or other goals. Contact me and let’s get started on a savings, investing, or retirement plan. #talktometuesday #education #Hireaplanner #stressfree #IRA #Roth #savings #retirement #CFPPro #whatsMYnumber