How Much Do I Need to Retire?
One of the most common questions pre-retiree’s have when be beginning to develop their plan for retirement is, how much is enough? Today I am going to cover a comprehensive analysis you should work through to determine what the magic number is for your retirement plan. There are a lot of numbers thrown around. Some people think they need half a million, a million, two million, three million. But what is the number? Well, that is a complicated question, the reality is that it's specific to you.
By following these five steps you will be able to get a better handle on what the funding needs are for your ideal retirement, let’s begin.
Step 1: Figure Out How Much Retirement Will Cost
The first step in determining how much you need to save for retirement is figuring out how much retirement is going to cost you.
This is where things can get tricky, and it does require some work.
One of the first things to do is take a look at what you're currently spending and put together some type of budget.
For example, this is a budget worksheet that I give to prospective clients. It's actually free on my website. I'll put a link to it in the show notes below. Again, this is episode 218.
When building a retirement budget, start with:
Your Liability Expenses
List any debts you currently have, such as:
Mortgage
Car loans
Student loans
Your Fixed Expenses
Next, list fixed expenses such as:
Real estate taxes
Condo fees
Auto insurance
Health insurance
This is where things can get a little tricky, especially with health insurance.
If you're retiring before age 65, health insurance costs may increase because you won't yet be eligible for Medicare.
However, depending on your income, you might qualify for Affordable Care Act subsidies, which could lower your costs.
If you're retiring at 65 or later, you'll transition to Medicare, and you'll want to research the different coverage options available.
Health insurance is often one of the biggest variables in retirement expenses.
Once you figure that out, many of your other fixed expenses may remain similar.
Develop your comprehensive plan for retirement at your own pace — Click here to learn more!
Variable Expenses
Variable expenses are where things can change the most.
One thing you'll have more of in retirement is time.
The question becomes: How will you spend that time?
If you're someone who:
Travels frequently
Has expensive hobbies
Enjoys being very active
You might actually spend more money in retirement than you do while working.
This is why taking a careful look at your current spending and adjusting for lifestyle changes is so important.
Another quick method is simply looking at your take-home pay.
Ask yourself:
Are you spending all of it?
Or are you saving a portion?
You can use that as a rough starting point, but ideally, you should still build a detailed budget.
So step one is determining your expected retirement expenses.
Step 2: Review Your Social Security Statement
The second step is to determine what you'll receive from Social Security.
If you've never created a Social Security account, I recommend going to:
Create an account and download your Social Security statement.
Your statement will show estimates of your benefits at different ages.
For example:
If you retire at 60, you can't collect Social Security yet.
If you retire at 62 or later, you can begin benefits, but the amount depends on when you claim.
For example, if your estimated benefit is $2,000 per month, that income would factor into your retirement plan.
Step 3: Determine If You Have a Pension
Next, determine whether you're eligible for a pension.
If you are, ask yourself:
Do you have a recent pension statement?
Can you generate an estimate online?
Do you need to contact the company managing the pension?
Once you know the estimated monthly benefit, you can factor that into your retirement income.
Step 4: Consider Other Income Sources
The next step is determining whether you'll have any other income sources.
One common option is part-time work.
Some retirees choose to work:
10 hours per week
20 hours per week
Others prefer not to work at all.
Other potential income sources could include:
Rental income
Trust distributions
Royalties
Inherited income-producing assets
These types of income can reduce how much you need to withdraw from your investments.
Step 5: Determine How Much Income Your Investments Need to Provide
Finally, you'll look at your investments.
Here's a simple example:
Let’s say your retirement expenses are:
$80,000 per year
Now subtract your other income sources.
Example:
Social Security: $25,000
That leaves:
$55,000 per year that must come from your investments.
The 4% or 5% Withdrawal Rule
One common approach is withdrawing a percentage of your portfolio each year.
You may have heard of the 4% rule or 5% rule.
The idea is that if your portfolio is invested in a balanced mix of stocks and bonds, it can potentially support withdrawals while still growing enough to offset inflation.
Stocks are particularly important because they historically provide a strong hedge against inflation.
Of course, stocks also introduce volatility, so determining the right allocation depends on your risk tolerance.
For example:
Someone invested:
70% in stocks may withdraw more income
Someone invested 40% in stocks may withdraw less
Click here to listen to this week’s episode on: What We Still Don’t Know About Trump Accounts
Example
Let's say you have:
$500,000 saved for retirement
With a:
4% withdrawal rate → $20,000 per year
5% withdrawal rate → $25,000 per year
Now imagine this situation:
Retirement expenses: $80,000
Social Security (combined): $50,000
You only need:
$30,000 per year from investments
If your savings can reasonably generate that income, you may be able to retire.
Why This Process Matters
Rather than guessing that you need:
$1 million
$2 million
$3 million
You can go through this process and determine your actual number.
The steps again are:
Calculate retirement expenses
Estimate Social Security benefits
Determine pension income
Identify other income sources
Calculate how much income your portfolio must generate
Once you know how much income you need from your investments, you can work backward to estimate how much you need saved.
Final Thoughts
Doing this exercise can give you clarity and confidence.
It can help you avoid two major mistakes:
Retiring too early without enough savings
Or working longer than necessary because you think you don’t have enough
If you'd like to download the worksheet I mentioned, you can head over to:
retirewithryan.com/podcast/episode-218
And if you're more of a do-it-yourself planner, you can also check out my online course:
Retirement Readiness On Demand
Just head over to retirewithryan.com, click Courses, and then select Retirement Readiness On Demand.
Or if you live close to me, you can attend one of my live courses as well.
I hope this episode has been helpful.
Have a great week, and I look forward to talking with you next Wednesday.
Take care.
Written by Ryan Morrissey CFP®, CLU®, CHFC®, CMFC
Founder & Principal Advisor of Morrissey Wealth Management
Host of the Retire with Ryan Podcast