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How Much Do I Need to Retire?

“How much do I need to retire” is one of the most common questions people have when it comes to their personal finances. Regardless of age, occupation, or socioeconomic status, most of us are wrestling with the same questions: How much is enough? How much do I need to be able to take care of my family? And how much will it take to live out my retirement dream?

If you’ve found yourself asking these questions, I have news for you – you’re on the right track. Asking these questions means you’re taking your finances seriously. It means you’re mulling over the fact that in order to enjoy the fruits of your labor… you have to actually save some of the fruits of your labor. Of course, no one is going to be able to know precisely how much you will need because we don’t know what life – or the markets – may bring, but history has taught us there are a few key variables that, if identified, will help you prepare for retirement with confidence.

 

Reframing Retirement

A common misnomer about retirement planning is that the “end goal” is framed around a specific age. From early on in adulthood we are inundated with this notion that at 65 years old we are going to hand in our two weeks’ notice and (in a pre-COVID world) enjoy a life of leisure while sipping cocktails on the beach. However, my advice would be to reframe your thinking around the following idea: Retirement readiness isn’t about your age – it’s about numbers. It’s a dollar amount and/or a stream of dollar amounts. It’s a nest egg that you’ve worked hard to accumulate over the years and is now large enough to give you the freedom to live out your retirement dream. It’s pension or real estate income you plan on gifting over a period of time. And while it would be nice for it to be a definitive, black-and-white figure, the reality is that a fully drawn-out plan is never finished and is always evolving, just as our lives evolve as well.

So how much do you need? It really depends. Some studies, such as one from Fidelity Investments, suggest that as a general rule of thumb you should save 10 times your income if you want to retire by age 67. If you want to retire sooner, save more. If you want to retire later, save less. Another school of thought pioneered by financial advisor Bill Bengen suggests that with the right portfolio, you could live off your savings for 30+ years by only withdrawing 4% of your money on an annual basis. For example, for every $1 million you have saved, you could spend $40,000 per year and comfortably make that nest egg last for 30 or more years.

 

Five Keys to Retirement

Each of these schools of thought have been tested and proven to work, but before making the plunge into retirement, it’s important to consider the five key elements that go into deciding how much you may actually need down the road.

Cost of Living

The nexus of your retirement costs will primarily be associated with where you want to live. Do you want to live in Hawaii or in a small town in the Ouachita Mountains of Arkansas? Do you anticipate your expenses to rise or fall in retirement? Will you become a “snowbird” and spend your winters somewhere warm or stay put in one place? Many retirees choose to downsize and live closer to family in retirement, but it is important to anticipate these costs in advance while you are planning for retirement. Things to consider in your budget may include:

  • Housing
  • Transportation
  • Food
  • Taxes
  • Health care
  • Discretionary (the fun stuff!) spending

Your Lifestyle

Retirement should be one of the most rewarding and fulfilling experiences of your life. Years of hard work and planning come to fruition and you are finally able to fill your calendar with plans of relaxation, travel, and time with your loved ones. As the journalist Jonathan Clements once put it, “Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money.” Important questions to ask as you are envisioning your plans for retirement include:

  • How often do I plan on traveling in retirement? And what does an ideal vacation look like?
  • What types of hobbies or interests do I want to pursue?
  • Do I want to take on any new adventures or cross some items off my “bucket list”?
  • What kind of experiences do I want to share with my family? Children? Grandchildren?
  • Do I plan on donating my time or resources to charities or nonprofits I care about?
  • Do I want to work part-time or own my own business in retirement?

Health Care

One of the largest and most overlooked expenses in retirement continues to be healthcare. According to a study from Fidelity Investments in 2019, the average couple will spend $295,000 on medical expenses in retirement, not including costs associated with long-term care. Over a 30-year lifespan in retirement, that amounts to nearly $10,000 a year. However, unlike the heath care benefits you likely received while you were working, the lion’s share of costs not covered by Medicare in retirement are paid out of pocket. 

As you begin planning for retirement, some of the best ways to help reduce those costs will be by taking advantage of savings vehicles such as a Health Savings Account (HSA), Long-Term Care (LTC) Insurance, or a supplemental policy, commonly referred to as Medigap insurance.

Social Security

In a world where pensions have largely fallen to the wayside, one of the most crucial components of a retirement plan is understanding your Social Security benefits. For many retirees, Social Security will provide their household with a steady income base, and if costs or expenses exceed those figures, they will supplement their benefits with personal savings (i.e., 401(k)’s, IRA’s, taxable accounts, etc.). 

To become eligible for Social Security benefits, you must accrue a series of “credits” by working for a 10-year period and the amount you will receive is calculated by averaging out the earnings from your highest 35 income generating years. And while Social Security is available to individuals starting at age 62, the more prudent decision is often to delay claiming your benefits until you have reached your “full retirement age” (between 65-67 years old). For workers who choose to begin taking their benefits at 62, doing so may result in a reduction for as much as 30% of their “full” amount, while those who delay taking credit may receive up to an 8% increase per year until they reach the age of 70.

Inflation

The last item to consider when planning for retirement is the rising cost of living over time. Historically, inflation has hovered around 2-3% every year, which means that after a few years, changes in prices may not seem significant, but if you are planning to live for 30+ years in retirement, they can be monumental. For example, if your monthly budget for groceries in 2021 was $1,000 per month and the cost of the items your continued to grow at a similar rate, in 2051 you would need close to $2,500 to pay for the same amount of groceries. 

As a result of these rising costs, those planning for retirement should always be looking for ways to invest their money. Outside of an emergency fund or cash sitting around for an upcoming purchase, at a minimum, investors should be looking for ways to keep their money growing a rate beyond inflationary figures. It doesn’t have to be speculative or even in the stock market, what matters is that you capitalize on opportunities that exist in the marketplace (to the extent that you are able) and your hard-earned savings are not being lost to inflation over time.

 

Bottom Line 

Preparing for retirement is a lot of work. For many of us, accumulating the wealth necessary to retire doesn’t happen overnight. It’s a long journey filled with lots of ups and downs, and we typically inch towards our goal one paycheck at a time. However, like anything else in life, the greater the struggle, the greater the victory. What’s important is that as you begin planning for retirement, you have a plan in place and are working with a financial professional who understands the connection between where you are today and where you want to be down the road.

If you have questions about preparing for retirement or would like to spend time with a professional who can help you sort through some of the information in this article, please give us a call. Our team at Mills Wealth Advisors are readily equipped to handle any questions you may have surrounding retirement and would be glad to meet with you.

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