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How much do I need to retire?

We often hear this question as people are nearing retirement.

A man trying to figure out how much money he needs for retirement.

We often hear this question as people are nearing retirement. They want to know exactly how much they need to save to live out their dreams in retirement. But it’s unique for each case. 

To truly understand how much you need in retirement, you have to first understand how much you’re planning to spend in retirement. Many of our clients don’t have a budget as they often feel they don’t need one. Their kids are out of the house, and they feel they can live comfortably the way they want with their income. You might feel similar. When it comes to planning for retirement, it’s vital to understand exactly how much you’re spending today. The reason for this is that most people end up spending more money in retirement than they did while working.  

If you want an easy template to understand your spending, download our budget sheet to get started.

But knowing how much you’re spending today is just the starting point. In retirement, your costs could be higher, especially when you look at your goals, the increased cost of health insurance, and long-term care insurance in retirement. Not only that but having more free time in retirement often means there’s more of an opportunity to spend. Usually, we see expenses go up 20% in retirement, so once you have your current spending identified, increase the monthly need by 20%. This is an estimated number that you need each month.

Once you have the estimate, you now want to consider what your Social Security or pension income will be. From there, you can identify what your shortage is between your spending and your fixed monthly income. That shortage needs to be made up with the investments that you have today. Depending on your asset mix and your risk exposure, it’s important to not draw more than 4 percent from your investments each year to provide for these costs however, this is a general rule. Each case is unique and there are a variety of factors to be considered.

There are a lot of details to calculate when running these projections too. From inflation reducing the value of the dollar to the varying costs of insurance, it’s often difficult to calculate this number with a year-over-year projection. We create calculations like this every day with our retirement plans. Also, it’s important to not base all your retirement decisions off of an estimate. Instead of relying on the estimate, go through our planning process to get a clear picture of your spending, year by year, with inflation factored in. This will give you increased confidence as you enter this next season. And not just that, but we look at ways to optimize your financial picture from a tax perspective, from a goal perspective, and from a risk perspective. All of this to ensure your retirement is carefully planned. To begin your process, talk to an advisor.

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