How Much Do You Need To Retire?

April 12th, 2022 by admin Leave a reply »

While there are countless generic retirement calculators available on line, there are several serious limitations to them from a planning standpoint. First, knowing how much money you will need for retirement is uniquely personal and specific to you and your circumstances, and there is no one size fits all tool to determine your needs. Second, and more problematic, there is simply no crystal ball that exists to predict the future. How much will you earn between now and retirement? How much will you be able to save? How much will I really need when I retire? What annual inflation rate should I assume before and after retirement? Will Social Security even exit to help defray my living expenses? What might happen between now and retirement to derail my plans?

Yes, there at lots of things we just don’t know and can’t completely plan for, and that is just the nature of life. But, perhaps the best we can hope for is to make some basic assumptions and at least get started on a plan. As with a business plan, a personal retirement plan works best when it is first created, and then modified each year to meet changing circumstances and the twists and turns life brings to us all.

So let’s get started with some homework you should do before any calculations are made.

How much money do you make today?

Your current income is a logical starting point for calculating your retirement planning savings needs. Generally, the more you make today, the more savings you’ll need for retirement to keep pace with the lifestyle you will be accustomed to at the point you retire. For most of us, the incomes we earn when starting out, and the lifestyles we lead, are far more humble than those later in life. When you retire, you want to maintain the last and/or best lifestyle you have grown accustomed to if at all possible.

When do you want to retire?

If you wait longer until retirement, not only will you be retired for a shorter amount of time, but you will also work more years, meaning you can save more before you do finally retire. Conversely, the younger you are when you retire, the longer you can expect to live during retirement and the more you need to have saved beforehand. In addition, the effects of inflation can severely impact retiring too early, or even retiring then maintaining your lifestyle.

What do you want to do once you retire?

What do you envision for your retirement years? Does your vision of life in retirement look like the one you have now with more spare time, or do you dream to do all the things you were not able to do during your working years, like travel to exotic places, own a vacation home on the lake, or perhaps buy an RV and travel the country? Conversely, perhaps you fancy the idea of an early retirement in exchange for a lower standard of living. There is no right or wrong answer to this of course, but understanding your desired retirement lifestyle is an essential element in answering the “How much savings will I need?” question.

How much will you collect from Social Security?

Most financial planners will calculate retirement needs assuming that monthly social security payments will defray living needs in retirement. Expected future benefit payments are available annually from the Social Security Administration and are based on your lifetime earnings to date. Personally, if you are currently under 50 years old, I would not count on the social security income in retirement. In fact, as a practicing CPA and money manager, I have advised my clients for the last 30 years NOT to count on social security as we planned for retirement. Believe me, I do hope it is there for you and me, but I consider it only icing on the cake at best, and simply would not count on it being there the rest of my life. One needs only look at massive budget deficits and the political landscape today to see just how possible the reduction or elimination of social security is more than possible.

Will you receive any 401(K), IRA, or other pension benefits during retirement?

If you contribute to an IRA or your employer 401(K) plan, or if you are covered under another type of pension plan, then congratulations and do continue funding as much as possible where you can do so. These plans not only defer taxes, but increase the amount of money you will have available to meet your living needs during retirement. Calculate your expected retirement benefit from these plans when calculating the amount of savings you will need to provide to meet your living needs.


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