Summary/TLDR
Having a general idea of how much you’ll need to comfortably retire requires answering questions about your income sources, spending needs, and legacy goals. A simple example is demonstrated in today’s post using a calculator I made for this purpose. While basic exercises and tools can be helpful, there is still loads of complexity lying underneath their surface. Working with a competent and knowledgeable planner to help you uncover every opportunity will prove invaluable in the long run.
Introduction
Unfortunately, there is no “magic number”, as everyone’s circumstances are entirely unique. For some, a nest egg of $500,000 might is ample; for others, $5,000,000 might be insufficient.
In the world of financial planning, just about every question begins with the same answer: “it depends”. Since I can’t The objective of this piece will be to help you understand what, precisely, your answer depends on.
To pinpoint your retirement goal, you must have answers to these primary questions:
How much income will you need?
How long will you need it?
Besides living comfortably, what else do you want to accomplish?
Breaking Down the Primary Questions
These primary questions can be broken down further into the following “sub questions”:
How much income will you need?
What are your sources of income in retirement?
How much will you spend in retirement?
How long will you need it?
At what age will you retire?
At what age will you pass away?
Besides living comfortably, what else do you want to accomplish?
What type of legacy do you want to leave for posterity, if any?
For now, we won’t address the issue of taxes. Taxes are obviously an extremely important piece of the puzzle, but we’ll set them aside for the sake of this educational piece.
Let’s examine each of these in closer detail.
How much income will you need?
What are your sources of income in retirement?
For the current retiring generation, most can expect social security or a government pension. Many might have employer pensions as well. You need to first take account of all of these. Write them down, put them in a spreadsheet – anything that organizes them comprehensively. Next, you need to know whether they will receive what’s called a cost-of-living adjustment (COLA), which is an annual adjustment to account for inflation. Social security receives a modest COLA every year. Most employer pensions do not.
Once you’ve done a thorough accounting of your income sources, you’re much better equipped to answer our first question.
How much will you spend in retirement?
Begin answering this question by evaluating your current spending. And don’t forget to account for insurance premiums (including Medicare), taxes, and other infrequent expenses such as home maintenance.
Finally, you must always account for inflation when answering this question. For example, if you currently spend $8,000 per month and plan on retiring in 10 years, you’ll need closer to $11,000 in income to maintain your current lifestyle.
How long will you need it?
At what age will you retire?
I recognize that many want to know how much they need to save so that they know when they can retire. It’s really two sides of the same coin. If this is you, then start by pinpointing when you want to retire and calculate the necessary savings for that age. You can then adjust based on different potential retirement ages, providing you with a range of options.
At what age will you pass away?
Obviously, nobody knows the answer to this question. I generally advise clients to plan with the assumption they'll live to 90-100, unless there are known health factors that might suggest otherwise.
Although this might seem overly cautious, remember it's easy to adjust this number later. As with retirement age, you can adjust this figure to provide a range of possible savings objectives.
What type of legacy do you want to leave for posterity, if any?
Legacy aspirations are deeply personal and vary widely. Some have no desire to leave an inheritance to their children, while others might want not only their children’s needs to be met, but their grandchildren’s as well. Still others are passionate about certain causes and envision leaving behind significant charitable contributions. What’s crucial here is clarity – know what your specific intentions are.
Putting It All Together
From here, things can get very complicated. To help you with the process, I’ve made a retirement calculator spreadsheet. While its results shouldn’t be taken as any sort of recommendation, it is relatively comprehensive and can serve as the first step in obtaining clarity. It accounts for taxes, inflation, and even multiple sources of income. You can download it here.
Let’s look at an example: John and Nancy are currently 50 years old. Here’s a snapshot of their answers to the questions discussed above:
How much income will they need?
Income Sources: John will receive a $3,000 monthly social security benefit at age 67, and Nancy will receive a $2,000 monthly benefit beginning at the same time.
Spending: While they earn $12,000 monthly, they only spend $7,500. Their goal is therefore $7,500 in today’s dollars.
How long will they need it?
Retirement age: They aren’t sure if it’s realistic, but they would like to retire by the age of 60.
End of plan: We’ll begin with assuming they live until they are 100.
What else do they want to accomplish?
What else do they want to accomplish?
Legacy: John and Nancy have no specific legacy goals besides leaving “whatever is left” to their children.
Using the above-mentioned calculator, John and Nancy discover they’d need about $2,000,000 to retire when they are 60.
Such calculations, however, only scratch the surface. If retirement planning were only about plugging numbers into a spreadsheet, financial planners like me wouldn't exist. John and Nancy, like many, have a slew of other factors to consider:
Are their current retirement savings in pre-tax, Roth, or taxable accounts?
How will the cost of healthcare impact their spending plan throughout retirement?
Are there any changes in tax legislation that will impact their taxes in retirement?
Will they need to adjust their spending in times when the stock market does poorly?
How do they need to invest their savings before and during retirement?
What if one of them dies prematurely or has an accident that leaves them debilitated?
While the calculator provides a valuable starting point, everyone’s journey to retirement is filled with unique nuances, goals, and concerns. To ensure your retirement plan is tailor-made to your specific situation and aspirations, you need to work with a competent and knowledgeable planner.
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