How much will I need to retire?
That's a question many folks ponder when considering their retirement planning needs. It sounds simple, but for many, this one question can easily confound.
Why? Because there is no one "right" answer. While no one can pinpoint an exact sum that ensures your financial security for now and always, there are some key considerations to weigh as you approach retirement planning that may shed useful light on the subject.
Below, we will discuss three considerations with respect to predicting how much you will need to live comfortably though your retirement years. While there is no magic number that makes your retirement fund sustainable, these tips should provide more perspective than a simplistic retirement calculator that does not take your personal situation into account.
Clearly, some of these considerations are only possible to estimate, not project with certainty. But that is true of anything in investing or financial planning. Realistic retirement planning is all about increasing the likelihood your portfolio lasts throughout your retirement.
Retirement planning consideration 1: Health and family medical history
You might be confused by this one, as many folks don't outright connect health and family medical history to retirement, but they are actually crucial.
Here's why: If you are trying to fund retirement (and we figure you are if you are reading this), then you must have some reasonable basis for determining how long your savings have to last. We call that your time horizon. In most cases, retirement investors' time horizons are at least their own lifespan. In some cases, a time horizon might be longer, based on spouses' life expectancies or other goals, like leaving a legacy for heirs.
The Centers for Disease Control and Prevention publishes tables showing average life expectancies for American men and women. But you can augment this by having a good grasp of your health and family history, which may help you understand how you relate to the average American.
Retirement planning consideration 2: Income and expenses
Drill down periodically into your expenses — including the fun stuff most people overlook such as eating out, vacations, hobbies and spoiling grandchildren. We'd suggest an easy first step is to identify your fixed costs (those that don't change over time, like a fixed-rate mortgage) versus variable (utility bills). List all your expenses and use averages for variable costs. The longer the period you average, the better. A lot of online banking platforms — including most from the big, tech-savvy banks — can sort and filter to help you.
You now know your current state. Next, project what will change in retirement. Because so many variables shift, this is harder for a 30-year old than someone five years from retirement, but it's a guideline. The closer you get to retirement, the clearer it becomes. For this reason, your retirement plan should be a living, breathing thing you check regularly.
Of course, the next step is to assess your income sources after retirement. Each year, the Social Security Administration should be sending you a statement defining the benefits you've accrued to date. Stay on top of that.
Next, ask yourself some questions:
- Do you plan to work some, or not at all?
- Will your spouse work?
- Do you have any other sources of income that will exist in retirement?
Tally all that and compare your expected income to your expected expenses. If there is a shortfall, this is how you can arrive at the annual amount you'll need your retirement investments to provide. It isn't truly about replacing some percentage of your working income. That is an industry fallacy. Rather, it's about determining what your needs and goals require.
Retirement planning consideration 3: Withdrawal rates
Some folks enter retirement without considering whether their withdrawal rate is sustainable in the long run. No matter how much money you've accumulated, if you withdraw 10 percent annually, you are risking depletion in under 20 years (a common, if not below-average retirement time horizon). And that's true regardless of how the money is invested. Conversely, if you withdraw 3 percent of your portfolio annually, the probability your portfolio survives 20 years is high.
Lower withdrawal rates increase the chances your portfolio lasts your lifetime but may require a greater sum to start with. So a question here is: How much risk of depletion are you comfortable with? In answering this, be sure not to forget our first point. Given medical advances, folks retiring even five or 10 years from now will likely have longer to fund than someone retiring today.
Once you know the shortfall amount and a withdrawal rate, you can estimate the amount you need to retire by simply dividing the amount by the rate. For example, if you need $60,000 in annual withdrawals, a 3 percent withdrawal rate would mean you need $2 million. But we would suggest pinpointing an actual number here is less important than understanding the process.
Bonus consideration: Expect the unexpected
Finally, it is imperative to expect the unexpected. A well thought out retirement plan should take unexpected expenses, problems and even bad market results into consideration.
Make a plan for how you and your spouse can cope when something goes against you financially. Where could you cut back? How can you reduce the strain on your savings? We highly recommend writing this game plan down and even sharing it with your adviser.