August 1, 2016

How Much Money Do I Need To Retire?

retirement planning, financial planning

$825,375.

It would nice if I could give you the exact amount of money you need to retire. Achieve that figure and walk away from your job. Stop worrying about the stock market, what the Fed is doing, or who says what in Washington. Hit your number and go.

If you type the search phrase, How Much Money Do I Need To Retire, into Google, you will get something in excess of 43 million links to that question or a close variant. Isn't that amazing? A question that is very personable still has 43,000,000 places you can consult.

That dollar figure above is probably incorrect for you. The amount of money you need to retire is based on these five factors:


What your goals are for your retirement


Do you want to spend the first several years traveling the world, visiting your adult kids and grandchildren, remodeling your home, or splurging on the RV you have always dreamed about before settling down? Or, are you really looking forward to staying close to home, being with family and friends, spending more time reading, relaxing, volunteering...simply enjoying your freedom?  

The answer will determine one of the most important questions about money and retirement: the type of lifestyle you want to live. While it is normal for after-retirement living expenses to drop anywhere from 25-50%, it is entirely possible to spend more while you are fulfilling lifelong dreams and aspirations. 

How much you have saved to this point


The average 55-64 year old American has set aside just over $100,000 for funding his or her retirement. That is around $300 a month spread over a typical life span. Add an average of $1,300 in monthly Social Security, minus the cost of Medicare, and that person will have to make due on about $1,500 a month, or $18,000 a year. That is not enough.

Most reports I consult say that an absolute minimum of $600,000 is necessary to provide a decent lifestyle in retirement, and that assumes two people receiving Social Security and with no major health issues to pay for. The most common figure given today on some of those Google pages is $1,000,000 or more. Even at that figure, your retirement will not be lavish, but with careful planning you should be good for the rest of your life. Does being anywhere near these goals seem completely out of your reach? Then the next factor becomes critical:


 How much more you can save before you want to retire


Are you willing to change your spending habits now to achieve your retirement goal? Can you figure out a way to put 20% or even 30% of today's income into your retirement investments? Can you move from instant gratification to delayed payoff? While the answer should be obvious, too many folks don't make the proper choice. 

But, it is a simple math question. What you have in savings and investments plus what you add to those accounts = your retirement nest egg. One plus one is two. There is no way to finesse a different result. Unless you don't want to retire until much later in life, you must sacrifice now to make tomorrow happen.


 How your health or family situation will affect retirement


The average American will spend around $250,000 in medical expenses after age 65. Even with Medicare and a good supplemental policy plus drug coverage,  you must plan on about $12,500 in year in medical costs. With a major health challenge, that figure can easily double. If you are already living with a serious health concern or two, plan on the higher figure.

Are you likely to have to care for one or two aging parents? When you or your spouse or partner needs assisted living or nursing care, will you have the money to pay for that? Will family members be willing to pitch in? Add those projections into your needed money totals.


 How long you will live


If you thought the first four factors were tough, I have saved the best for last. None of us like to face our own mortality, but the question becomes quite important as you run numbers through your retirement calculator. If you come from a family that has many members who make it into their 90's or beyond, then you should probably be on the safe side and assume you will live that long, too. 

If you take care of yourself, watch what you eat, and are generally happy, statistically you are likely to live longer than someone who believes pizza is one of the major food groups. Of course, any one of us could be hit by a car tomorrow. But, prudent planning cannot assume anything.


A previous post, Retirement May be Bad For You, suggested retirement isn't the best choice for everyone. If that is you, pass this information along to a friend. Otherwise, I hope these five retirement planning factors help you work through some tough questions. 



28 comments:

  1. I remember how hard we worked and how hard we saved during our working days. But I don't think we ever stopped to look at how much we would need to retire successfully until we were in our early 50's! I remember a mind set of "work very hard and save as much as you can" mentality. Fortunately it served us well, but not because we had a specific goal in mind. It was simply our intuitive sense of the need to save that helped us to create a secure financial future. Kind of haphazard, but we were lucky it worked for us.

    I've often thought that part of high school education should be a course on finances and the future. I wonder if young people would look at their financial future differently if they were shown different scenarios of saving as it relates to a comfortable lifestyle in the future. If they learned the meaning of compound interest, would it inspire them to find a good balance between saving and spending?

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    1. To not have a high school level course on financial literacy 101 is a major mistake. While I could argue it is the parent's job to teach their children the basics, too often the parent's are making the same mistakes in managing financial matters.

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  2. I wish compound interest actually played into my retirement funds!

    It is all expectations, isn't it?

    The $600,000- $1,000,000 idea. Do you think that is net worth, or cash/liquid investments? I know the million mark is what some higher end retirement communities require before you are allowed to "buy in".

    We are pretty sure we will purchase a granny pod in the next twenty years. Hopefully they will have the robotics worked out so we can live there into our 100's (which seems to be our family's end numbers).

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    1. I would guess the 600-1 million is supposed to be cash/liquid investments. If you use your home as part of your totals, for example, that isn't helpful since you could sell the house and use the equity, but where would you live? I guess if you sell everything you own and move into a tiny house the net worth total would be accurate!

      I remember compound interest. It was quite an important concept before interest rates turned toward zero, or even negative in some cases.

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  3. Never enough, but somehow it will work out.
    b

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  4. Great article, and lots to think about. Add to this the one that came out in Top Retirements about how we tend to underestimate by several years when we actually will retire. We're still not calculating what will happen when health and jobs go South. It stated many of us are getting retired in our 50's when we 'planned' for it to happen in our 60's.

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    1. My story, too. I "planned" on retiring at 62, but was out of the workforce at 52. That extra 10 years made for some sleepless nights. But, everything worked out well.

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  5. I can't help but be struck by our assumption that we are qualified for, there is available, and have a job that pays a good salary through our lifetime. $18,000 a year would be a blessing for too many people.

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    1. While $18,000 may be insufficient for even very bare bones existence in America, it would be more than enough in many countries around the world. That alone is one of primary reasons for the growth in retirees becoming expats.

      If the average retired American must spend around $12,000 a year on medical costs, $18,000 quickly becomes $500 a month for all other living expenses. The only way around that is to skip virtually all medical needs or make the emergency room one's second home.

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  6. This has been a topic near and dear to my heart for many years. Well before retiring at 60 and Deb earlier at 57, we talked quite a bit about early retirement and could we make it. We looked at various scenarios involving selling the house, living full-time in an RV, and so on, and settled on moving to a state with a lower COL. All the while we lived within our means, and saved and invested actively. Compared to many people we are "set" if you want to call it that, but I always worry that whatever figure you come up with or have, will it be enough?

    Eventually there comes a time when you have to just say we did our best, we fought the good fight, and make the leap. I personally feel that many people lowball what they have when asked in surveys, since people have been conditioned to expect things if you can position yourself as having less than the next guy/gal. We don't see people starving in the streets because they didn't save enough (perhaps other reasons, but not likely because they didn't save enough.) Most retirees we know, and we know many, are doing well. I don't believe that is because we only know a certain type or class of lucky retiree, since I know people from all walks of life and backgrounds.

    This doesn't really answer the actual topic subject of "how much" since there are too many other variables that are needed to be looked at. For example:

    -What are your current expenses? Will they change dramatically in retirement?
    -What debts are you carrying into retirement?
    -What income streams can you expect besides SS?
    -What are your plans regarding living arrangements? Stay put, downsize, etc?

    There are more questions I could ask but the bottom line is there is no "one size fits all" answer, as everyone knows. But it needs to be discussed, and the earlier in life it sinks in, the better. I was fortunate that I took a great interest in saving from an early age, and actually liked investing. Many can be the same way if they are exposed early in life. Regardless, I truly hope each and every one of us can be successful in this regard, and enjoy what we worked so hard for all our lives.

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    1. Thanks, Chuck, for your thoughtful and detailed overview. I started saving in my late 20's. As our income grew, Betty and I put up to 30% each year into investments and Keoughs/IRA/SEPs. Thank goodness, since I didn't expect the checks to stop as early as they did.

      I agree completely with your point that you can't worry about whether what you did was sufficient. One does the best he can and gets on with living life.

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  7. We were lucky enough to work in N. California for a stretch in the dot com years and pad our retirement then. It sure helped when the markets turned down...at least we had a nest egg that kept growing, albeit slowly some years.

    I finally came to the conclusion there was no set amount that was going to make me 100% comfortable, because we can't see the future or predict our health care needs or age of death. So I just made the leap. Now, after nine months, I cannot imagine going back. If I had to eat tuna fish, beans and rice daily to survive, it would beat the last two jobs I had. My health is better, I'm sleeping sounding, and my mental health has turned around 100%. I had no idea the stress I was under until I quit. Retirement rocks!
    --Hope

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    1. Good for you, Hope! I like tuna, red beans and rice, so I'd be fine also.

      I am not worrying about the financial future, but I continue to keep a budget, project income and outgo, decide on vacation plans or house redecorating expenses carefully...all the stuff that got me where I am today. I don't think I could spend freely without planning even if I tried.

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  8. How Much Money Do I Need To Retire? It's a question that can't really be answered until after the fact. Hope has it right "we can't see the future or predict our health care needs or age of death". For me, as Chucky said "we did our best, we fought the good fight, and make the leap" and that's actually how it is. I retired at 62 and I am living on only my retirement savings until 70 to max out the government pension payments, I also intend to spend my retirement savings down by my mid-80s. I saved that money for decades so I could spend it and that's what I am going to do. If I live long enough I won't be destitute or anything, I'll still have the paid off house to sell if I need more money and the maximum on the government pension for my day to day expenses which should be enough (I live in Canada so medical isn't quite the same concern as in the US but one never knows). Am I doing the right thing? Only time will tell but as Hope also said "My health is better, I'm sleeping sounding, and my mental health has turned around 100%. I had no idea the stress I was under until I quit". That's worth quite a bit.
    - David

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    1. I didn't realize how much stress I was imposing on myself and my relationships until I retired. It was as if I had been reborn as a different person.

      The debate between spending more now to enjoys ourselves or keeping things in check for the future or for any inheritance you want to leave is one with no solid answer. I have gone back and forth on that question several times.

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  9. This is all great advice. But I do think we sometimes put too much pressure on ourselves and our fellow retirees to save so much money, otherwise there's something "wrong" with you, or else you're going to starve to death. So much depends on our expectations and our lifestyles. Some of us may not mind sharing housing, for example, and not everyone wants to travel, and we might not even need a car if we live in an area with public transportation.

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    1. All true, Tom. I am more than ready to cut back to one car (Phoenix isn't set up to be car free).

      One of the unknown parts of the discussion is the role your family might play in helping out as you age, and how comfortable you are with that possibility. For me, I thank my parents every day for the preparations they made to be sure I didn't have to worry about their care. I don't want my daughters to have that concern either. So, that does affect some of my decision making and how we spend our money.

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  10. Good summary and good comments as usual. We are half way into our trial retirement year and all is going well. My wife is planning to retire next year. Looks like our income sources should carry us through even if we live to 100, barring major medical issues.

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    1. Good for you! Obviously, you planned well. The idea of a "trial" retirement year is great.

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  11. I agree, Bob, that we can have a more satisfying retirement with a sizable savings, but through personal experience I can assure you that those with $18000 a year or less incomes are not paying $12000 medical expenses per year. Most receive government subsidies to help with insurance payments and prescription drug charges. They can eat a subsidized lunch for a few dollars at the local senior center and entertain themselves with the penny slot machines at the nearby casino. They may also be eligible for rent reductions in some senior housing facilities and when they are in need of long-term health care, Medicaid takes over and provides nursing home care. Who is paying for their subsidized lifestyle? Those of us who saved and prepared for our retirement. Do I sound bitter? I hope not because I prefer being able to choose my retirement lifestyle and health choices.I'm just the sister who saved and planned while she watched her siblings take extravagant vacations and drive expensive cars while saving nothing for the future and I've been amazed at how well they are living in retirement. :)

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    1. Not a happy story, but I appreciate you sharing it. There are different paths to retirement, not all of them take others into consideration or seem fair.

      And, yes, someone living on $18,000 a year is several thousands dollars above the official poverty level but is still likely receive the various levels of support you mention. Even so, that is tough.

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    2. That depends on the state.

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  12. This article should have been labeled... "How much nestegg do you want before you quit working". We only really need something like a teardrop trailer parked in the alley and perhaps a sack of rice and beans. Anything above that is a bonus. What we really need and what we can accept are different. Perhaps vastly different.

    So what lifestyle (and associated nestegg) are you willing to work towards. How much of your life will you devote to the man so that you live better than just survival.

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    1. Needing and accepting are different, but a small trailer and a diet of rice and beans may be more than I could accept for the long haul.

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  13. Hello from Doha, Qatar

    My wife and I are both teachers in a large American school here in Doha, Qatar. My wife is from the USA and I am from NZ. We have taught overseas for over 20 years and are contemplating returning to one of the our countries and go into a semi-retirement doing part-time work as we are only in our mid-50s.

    We have saved well while we have been overseas since we don't expect any pensions, social security or medical insurance. I am interested to know how much medical insurance is likely to cost for my wife and I if we were to return to the USA? (Two years ago I had open heart surgery which probably complicates things).

    We will be mortgage free.

    Apart from medical insurance (that includes prescription drugs), and taxes what other things do we need to consider if we decide to pull the plug on our overseas teaching careers?

    Thoughtfully yours

    Tony Erni

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    1. Hello to the Mid East! Thanks for touching base, Toni.

      Medical insurance coverage is a continuing nightmare for many. If you will be self insured and earn under $48,000 you may qualify for some subsidies through Obamacare. But, that setup is being seriously tested by the lack of health insurance companies willing to participate.

      If your income is higher than that, expect to pay at least $600 a month per person for what would be considered a silver level policy (average converge with a high deductible). In some states you would pay less, in others much more. If at all possible try to find a part time job that includes health coverage. That will make a huge difference.

      You will need to think about buying or renting your housing. I would advise renting until you are sure you like where you have chosen and can get a handle on costs.

      If you want a more urban lifestyle, then obviously living in a larger city would be best. That may allow you to get by without a car, at least for awhile.

      I have no idea what the medical situation is like in New Zealand, but it must be better than in the U.S.

      Best of luck. Stay in touch as you work through this decision.

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    2. Thanks for the advice Bob. I had thought about renting for a while before buying a place just in case things did not work out. I do want to work but not full time (unless I found the perfect job). I would like to earn enough to live on and not have to touch what we have saved. At this stage I figure if we can avoid touching our savings for 5 years that should put us in a good place.

      The medical insurance wildcard is a concern but I have done a little research on part time jobs that also allow you to participate in a medical insurance plan. I have to admit that moving to NZ is a definite possibility because I would not need to be so concerned about medical insurance - I can actually do without it as we have a similar set up to Canada.

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