How Much Money Do I Need to Retire?
News Flash! US News Smarter Investor Blog showcases my; Create Your Optimal 5 ETF Portfolio. And Bankrate.com and Yahoo! Finance published my retirement interview, Early Savings Pay Off Later in Retirement
There’s a lot of talk about saving for retirement and how much money you will need. To help with this dilemma, there are calculators, books, and articles galore. The simple answer to “How Much Money Do I Need to Retire?” is, you need a lot of money if you anticipate living large in retirement and not so much if you’ll reside in a camper, and park it on a beach in Mexico.
For many in their 40’s, 50’s, and 60’s, there’s the fear that “I haven’t saved enough.” That fear hits when you read an article about retirement, or experience job uncertainty, or retirement planning is mentioned on the news. The automatic reaction for many is to change the channel, turn the page, or divert oneself from the topic.
Please, don’t avoid this topic. Even if you’re in your 20’s, the earlier you begin saving for retirement, the wealthier you life will be. By starting now, you give yourself the opportunity of choice and freedom that a six or seven figure retirement nest egg affords.
I was speaking with some older friends recently who divulged that they are panicked about retirement. Devon, the husband just lost his job at age 65. They live in Manhattan and want to remain in New York City, yet they can’t afford to retire right now. They do not want to move and Devon is job hunting. Their solution regarding retirement planning is to avoid talking or thinking about it.
Avoiding Retirement Planning Will Not Make it Go Away
Fight the urge to avoid and create an action plan.
How do you go about figuring out that one perfect number to shoot for? First off, the future is unknowable, there is no perfect number.
My dad got very sick and moved to a nursing home. No one predicted that the strong, independent, self reliant guy would need this type of help! Dad rarely missed a day of exercise or healthy eating. Fortunately, he and my mom saved and invested from the beginning and thus had the funds for his care.
How much to save for retirement depends on many factors. Todd Tressider, financial coach and author of How Much Money do I Need to Retire mentions 7 questions to answer when considering how to save for retirement. The response to every question is a guess; but the questions get you thinking and planning for retirement.
Write out your answers to these retirement questions:
1. What amount of money will you spend every year from the day you retire until the day you die?
2. What will be the inflation rate during your retirement years?
3. What year will both you and your spouse die?
4. How much money will your company pensions and Social Security pay over the duration of your retirement?
5. What will be the growth rate of your investments over your remaining lifetime?
6. What will be the sequence of those investment returns? Will you have good years in the beginning followed by bad years or vice versa?
7. What age will you and your spouse retire— regardless of whether it is voluntary, due to unexpected sickness, or due to forced layoffs out of your control?
“Not to be a pessimist, but can you see why this is not the exact science that the books, calculators, and financial planners have led you to believe? Hidden behind the scientific façade of computers and mathematics are some very big assumptions. None of these questions can be answered with certainty, yet all of them must have accurate answers or your estimate for how much money you need to retire will be wrong.” Todd Tresidder
How to Plan for Retirement
Think about expenses which will be reduced, such as gas and dry cleaning. And counter-balance those with costs that may increase, like healthcare. Map out several scenarios.
After you ballpark some estimates for future retirement expenses, use a retirement calculator to get a dollar amount. I used this retirement calculator to project my future retirement number. I put in a few scenarios in order to test out various alternatives. It gave me an idea of both best and worst case financial outcomes.
Accept the fact that there’s anxiety in this type of planning. The worst alternative is to do nothing. I know far too many people who avoided planning and are filled with regret and stress. Saving more now is better than doing nothing.
My recommendation is to save as much as possible starting now. Since retiring in a recession or boom time can impact your long term retirement wealth as can inflation or unplanned health expenses, it’s a good idea to set a financial target and work towards that figure.
Waiting, avoiding, and overspending will lower your long term wealth and increase your stress. Once you look at the projections, you’re on your way to taking control of your future.
1. Set aside a few minutes to review your money coming, going out, and amount in savings and investing accounts.
2. Increase your workplace retirement and/or Roth IRA contributions.
3. Schedule quarterly financial reviews and make sure you’re diverting enough of your today’s earnings for tomorrow. Use a retirement calculator to decide whether you’re on the right track or not.
How much attention and time are you devoting to your retirement planning?
A version of this article was previously published (some comments remain)