Do You Know How Much You Will Need for Retirement?

March 22nd, 2018 by Bunch & Brock

One of the hardest questions we all must answer – financial or otherwise – is “How much money will I need to set aside in order to comfortably retire?” Tailoring one’s unique answer can be a bit of a challenge, so we’ve come up with some general guidelines which might help your answer reveal itself.

In finding a specific “retirement goal” for their clients, many financial advisors find themselves analytically placing the cart before the horse. It’s not hard taking what someone is spending today and projecting how much they need in order to sustain the same level of spending at retirement. But therein lies the problem.

That model doesn’t take into account that once people retire, their spending patterns can significantly change from what they were when they were working. Most find that many of their living expenses drop when they no longer have to pay the costs of working. Some prefer living more austere, inexpensive lives.  And others “shoot the works,” taking on expensive hobbies and exotic travel – with a corresponding rise expenses.

We all know the general rubrics of retirement planning are to develop reasonable saving habits, prudently invest, periodically review our retirement goals and, if necessary, not get boxed into a program if our vision undergoes change – as most will from time to time. Then you can develop and execute a versatile retirement plan and spend more or less as you go, depending on how well your retirement nest egg grows. By using this approach, you can keep an open mind toward your retirement goals, avoid possible disappointments on the way, and still live your life to the fullest while you’re young enough to enjoy it, regardless of your financial situation.

Yeah, we know. You still want an arbitrary “how much?” There’s an easy way to calculate how much you “should have saved” before retiring. Divide your desired annual retirement income by four percent – the generally accepted maximum amount you will annually withdraw from your nest egg to pay for your living expenses in retirement.

Here’s an idea of how much money you must save  to finance your desired retirement lifestyle. If you can live on $50,000 a year (in today’s dollars), you’ll have to save $1.25 million. Take a look at the chart below to see how much you need for an annual retirement income that ranges from $40,000 to $250,000 a year.

For example:

  • $40,000 desired income annually will require $1,000,000 in savings [40,000 ÷ .04]
  • $50,000 . . . $1,250,000
  • $60,000 . . . $1,500,000
  • $100,000 . . . $2,500,000

When determining your magic retirement number, be honest. If you make $100,000 today and spend all your take-home pay, it’s rather careless to think you can save enough to happily live on $50K a year in retirement. So you’ll have to come up with a plan beyond savings alone.

Even if you can manage to consistently save 10 percent a year of a $50,000 paycheck, you’ll still have to work around 52 years (enter $50,000, 5,000, 45,000, 10% and 0 in this chart) before you can afford to maintain your current lifestyle in retirement. If you’re 22, that means working until you’re in your 70s. Now, of course, you’ll get raises and change jobs for better compensation packages during your career.  But you can’t quantify the future — only save for it.

If you only manage to save six percent — the average rate for Americans — it will take you 62 years to accumulate enough to match your current income in retirement. And you’ve heard this before: The earlier you start saving, the more you can take advantage of investment growth (and not coincidentally, what you must save out of pocket to “prime” your retirement pump).

If you want to estimate the future value of your retirement savings and the veracity of your current retirement investments, Kiplinger has a great Retirement Savings Calculator.

Successful retirements are a combination of strategic savings, astute investing, and consistent planning. Bunch & Brock, Attorneys at Law, has the experience, knowledge, and resources to help with your investment and legal needs. If you would like to set up an appointment, contact us online or call us today at 859-254-5522.