November 28, 2011

How Much is Enough Money to Retire Comfortably?

The quick answer is, no one knows, including you.The amount you need to retire comfortably and live a satisfying retirement lifestyle is dependent on so many variable that a definitive answer is impossible. That doesn't stop all sorts of web sites, blog posts, financial advisors, and others from giving you their opinion. I caution you to use what you learn in this manner only as a piece of the total puzzle, not the ultimate solution. It shouldn't be surprising that I am not going to give you a hard and fast number either. But, I am willing (or foolish enough) to take a look at some of the factors that will help you arrive at the "magic" number for you.

What is First?

The first step to to assess your expected income. While many of us lived our working lives spending more than we made, that was dangerous then, and fatal now. Once you retire, if you spend more than you have resources to support you could be in big trouble. Why? Simply because you cannot predict the future: what will happen to your income stream, your health, even how long you will live.

Retirement income comes from several sources. For most folks your pension, 401(k), IRA, annuities (a contract between an individual and an insurance company promising lifelong income in exchange for an upfront payment), and other investments will be an important source of financial support. Take the time to figure out exactly what you have and what they are likely to produce for you on a consistent basis. If you are unsure, now is the time to get a firm grasp on your assets, and make any adjustments as needed.

Based on those sources, you can use a basic retirement withdrawal calculator to predict how long the money will last if you withdrawal a certain amount each month. As you do so, don't forget to factor in your best guess for inflation, whether you want to leave money to family, any tax consequences, and appreciation of hard assists, like art or classic autos.

Social Security is another pillar of your financial house. The government web site provides a calculator that allows you to predict what your monthly checks will be, depending on when you begin accepting checks. If you missed it, read a post from last month, Social Security: Help Me Decide.

Do you expect any inheritance from a parent or relative? While I strongly suggest you don't count on this money for part of your planning, knowing it may be there for you at some point in the future allows you to make "what if" plans.

It is Budget Time

Next, develop a retirement budget. You will have certain expenses that continue whether you are working or not.  If you own a home property taxes aren't about to cease. Cars will probably be needed well into your satisfying retirement; remember to plan for both repair and replacement. Food, utilities, vacations, health care costs, clothing...these things will continue.

What will take some real thought on your part is the shape you want your retirement to take. Do you have plans to travel extensively or buy a vacation home near that favorite lake or ocean? Do you want to see family members on a more regular basis which means more travel? Is an RV and the open road calling you?

Or, are you anticipating a simpler lifestyle, one that keeps you closer to home. Are you content to explore opportunities to become involved and volunteer in your own backyard? Are you thinking of downsizing your living space to save expenses and work?

What about adult children or parents? Will they be part of your life both in terms of time and expenses? Should you budget for extra money in case your parents end up needing substantial financial support?

Obviously, a large factor is deciding which of these retirement lifestyles (or a combination of them) you plan for is determined by your income. I've always wanted an RV, but the budget to buy and maintain one doesn't exist. I'd spend my summers in Flagstaff but responsibilities to my Dad make even that 2 hour distance not feasible at this time. I retired before my financial foundation was where I expected it to be. Through a conservative lifestyle and prudent budgeting things are just fine. But, I determined early on the champagne lifestyle wasn't going to happen on my beer and wine budget.

Things Change: Plan For It

Importantly, my desires for that lifestyle have changed. It no longer appeals to me. Being home, with family and friends is what makes a satisfying retirement for me now. Volunteer work with the prison ministry organization, lots of time spent involved with church, and the simple pleasures of reading, hiking, and enjoying all Arizona has to offer are what I aspire to know.

The bottom line for you: pick the lifestyle you think you want to retire to and budget for it. If the numbers work for you, great. If they don't figure out where you can prune while still maintaining what is most important. But, don't be surprised if your goals change as you move through this stage of life. It is the rare person who can predict at the beginning of retirement what his or her interests and desires will be 10 or 15 years down the road.

One more hint: I believe there are two retirement lifestyles: early and later. If you love to travel and explore you are much more likely to do that in the first decade or two of retirement. If you want to scuba dive the ship wrecks off the coast of Bermuda, don't wait too long (I've done that and it is a blast!). That means your budget will show dramatic shifts over time. What you set aside for travel in the early phase will taper off, to be replaced with higher expenses in health care or maybe dining out.

How much money is enough to retire comfortably? The simple answer is enough to allow you to live the way you would like to at each stage of your retirement lifestyle tempered by the reality of your financial foundation.

The real answer is not one really knows, including you, until you are in the midst of it. The best you can do is plan well, adjust as needed, and be happy with what you have. The most miserable risk in retirement is not running out of money, it is running out of the joy and satisfaction that retirement can mean for you.

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  1. Good article. I agree a lot of planning has to go into retirement. But remember, men plan while God laughs. You gotta underline and put in boldface the part about "adjust as needed." For me, I know I have a cushion; or a Plan B, if you will. If something happens -- big medical bills, stock market crash, something like that -- I know roughly speaking how I can triage my ongoing expenses, and then not worry about it.

    Btw, if I may ask, what's the weather like in Flagstaff and Sedona in Feb./March? We're planning a trip (well, we're talking about it; dunno know if it's really going to happen) and want to know if it gets real cold, if we have to worry about snow, if we can get to the Grand Canyon in Feb./March. Thanks for your advice!

  2. Sightings,

    I have always liked the line "men plan while God laughs." Sometimes we get more than a little sure of our ability to do whatever we want. The ability to adjust is a necessary skill.

    Regrading your vacation question, Flagstaff would have highs in the low to mid 50's with lows in the 20's. Snow is likely, but it melts quickly during the day in the city but keeps the ski resort open until April. Sedona is warmer by about 10 degrees with some rain likely possible.

    Sedona and Flagstaff are only about an hour apart so it is easy to enjoy both in one vacation. Sedona is best known for the incredible red rocks, while Flagstaff is a great university town with lots of outside activities.

  3. We have lived on our current income for many years (before we retired). I had money in the stock market via a 401K but got out before the downturn. I always saved 10 percent of my after-tax income. (I am a fiscal conservative)

    While I was working, I saved for my education in my retirement years, but pay for it out of pocket each month and keep my IRAs intact. I also have set aside money for granddaughters college (4 girls).

    We never bought all the house we could afford (per our realtor), and always kept our bills in the same ball park. I paid off my car, and we got traveling out of our systems years ago.

    We live the same way we always have, clipping coupons and choosing how any discretionary funds will be spent as we go. We have LTC plans and good health insurance policies. We have enough. All you need is enough. Dianne

  4. Diane,

    "All you need is enough." If only more folks understood that there would a lot fewer people facing a rather bleak retirement. Your financial restraint has served you well.

    Thanks for your comment, and the link to your blog. It looks quite interesting. Expect to see me as a regular visitor!

  5. The Canyon is best in the winter when the tourists are afraid to travel there. Summer it is you, and 10,000 others, looking out the same ledge!! Remember that Flagstaff is about 7500 ft and snow is a real possibility from End of Nov to mid May. Truly, it is God's country! Wave to my old house on HWY 180 if you go!

    I am impressed that Schmidleys have not only saved for themselves- but their grands. We have decided that our number is whatever we have in the bank today. Right now- we are just leaving all savings in place and living off of pension and substitute teaching. No, you do not have to have a teaching certificate to substitute- but you do need a license(which entail fingerprinting, background check, a high school diploma and $$ in many states.

    As far as two retirement plans...that is something new to us. We have always had one- but a second (oh heck!) is looming. We have to be more serious about medical if the government pulls military health care to be private. It is a new rumor- but these rumors tend to have a way of growing legs this time of year.

  6. Janette,

    I'd echo your comments about visiting the Grand Canyon, though in February/March be prepared for a chilly look at that big hole in the ground. Of course, at that time of year the North Rim is closed due to heavy snow.

    Your number is whatever you have in the bank excellent approach. Waiting until you have the "perfect" amount to retire may mean being perpetually short of your goal.

    I hadn't really thought much about having an early and a later retirement plan, but a comment by a reader made me think that he might be on to something important.

    For example, my wife and I are seriously discussing taking extra money out of our IRA each year for vacations now while we are still healthy enough to travel and still have the urge. At some point we will decide that we are done with travel, or health will decide for us. But, we are of the mind right now that saving that travel money for the future may mean some trips are never taken.

  7. Bob,

    Budgeting is one thing my husband and I are not good at. We are not in debt, like many with credit card debt, we're just not good at determining how much we'll need to retire. I think we might have to invest in some income properties since social security doesn't look that promising for us down the road.

  8. Steve in Los AngelesMon Nov 28, 10:17:00 PM MST

    Hi Bob,
    In my case, there are three retirement lifestyles. They are (1) pre-retirement (which is where I am now and probably where I will remain until between ages 65 and 70), (2) early retirement (which will start no later than age 70), and (3) later retirement (which will start when my health starts to decline). Pre-retirement definitely ends when I am completely out of debt (including the mortgage on my condominium) and I am living on all of my income sources (including Social Security). I will be in pre-retirement or early retirement as long as I am able to go on healthy walks of at least four miles per day (provided that the weather is acceptable).

  9. Sonia,

    Income property can be a source of small but steady income...or...a real drain on your money & time. My wife and I owned 4 rental homes for several years and got tired of all the landlord hassles.

    In most cases the homes had a minimal monthly positive cash flow that was easily wiped out when a dishwasher broke, the AC or sprinkler system needed repairing. The profits came when we sold them.

    In my experience it is not an easy way to make money unless you can buy low, have trouble-free tenants, and sell the properties as the market moves up strongly. There are tax advantages and your tenants do pay the mortgage for you, but we just didn't find enough monthly cash flow to want to continue.

  10. Steve,

    I always enjoy reading your comments. You are organized and focused with a plan and well-thought out goals. Walking 4 miles a day should keep you in the healthy phase of retirement for a long time.


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