How Much Do You Need for Retirement

Posted on Posted in Retirement

With baby boomers hitting 60, the question on everyone’s minds these days is how much you’ll need for retirement. The answer isn’t the same for everyone.

We work practically all our lives in order to provide for our families. We have to contend with so many expenses – our mortgage, our children’s education, medical expenses, food expenses, etc. You work in order to earn money to address all of those expenses. But you also work in order to prepare a nest egg for your eventual retirement.

The prospect of retirement brings with it mixed emotions. One is the relief that finally, you can just relax and enjoy and be able to pursue your other passions and hobbies and spend more time with your family. But then there is also the fear that the nest egg that you have prepared for yourself will not be enough to last your retirement years.

How much does one need for retirement. The answer depends on what your expectations are for retirement. Are you looking forward to a life of relative relaxation like painting, gardening or taking care of your grandchildren? Or are you planning on a retirement that is filled with activities like travelling overseas, frequent dinners in expensive restaurants and other social activities? Or perhaps you plan to do a little of both? Maybe you even plan to continue working part-time (this makes a huge difference). First try to envision how you want to spend your retirement and from there estimate the amount of money that is needed to fund those endeavors. This is a good way of finding out how much you will need to retire.

As part of the estimations that you will make in order to find out how much money you will need for retirement, you must also consider the expenses that you expect will increase when your retirement comes. Among these expenses are your health insurance premiums, medicines and travel expenses. Some of these increased expenses may be cancelled out by expenses that are most likely to decrease like work-related costs (transportation, food, clothes), educational fees and entertainment expenses. It is also possible that by the time you retire, you’ll have paid off your mortgage; one of the biggest monthly expenses.

Another important thing that you should do is to make an educated guess with regards to how much money you will accumulate over time (the growth of your projected earnings) as well as the inflation rate. You will be retired for many years and should continue to aim to maximize your overall wealth during these years. Even in retirement, we recommend aiming at 10-12% growth via solid mutual funds. Don’t settle for anything less, especially the bad, but common advice of putting your money in cash or bonds for security. The only money that should be in cash or bonds at any time of your life is that money that you’ll need within three years.

Although the inflation rate has been relatively low for the last few years, you should keep a steady eye on this metric as it determines the overall purchasing power of your money.

You should also be able to prepare for certain situations that are usually overlooked when preparing for your retirement plan but could have a tremendous impact on your savings. These situations include a temporary loss of income, illnesses, or the cost of caring for your elderly parents.

If you are planning on retiring at an early age then you must take extra attention on your money-making endeavors. It is a good idea to keep a good mix of taxable and tax-deferred investment options that can appropriately fund the early years of your retirement.

Questions to Consider When Calculating Retirement Needs

1. Do you expect to spend more or less in retirement than you do now?

If you have plans for traveling a lot, expect to spend more than you do now. If you mainly expect to relax in the comfort of your own home, expect to spend less.

2. Do you expect to work?

If you plan to work part-time in retirement, then you don’t have to save nearly as much money in preparation. By working as long as possible, you delay having to cut into your nest egg

3. Are you willing to invest, even in retirement?

For better or worse, many financial planners have convinced their clients that investing during retirement is too risky. Quite simply: they are wrong. What’s actually risky is not investing the money you don’t plan to need for at least three years. Especially in retirement, you should continue to let your money work for you. It works by investing it and aiming to make 10-12% interest per year.

4. Have you paid for your house?

If you own your house outright with no more debt, then you are in a unique situation. Throughout most people’s lives, they spend close to 1/4 of their money on mortgage or rent. By owning your house outright, you are eliminating a major monthly expense and significantly reducing the amount of money that you’ll need in retirement.

Doing the Calculations

After asking yourself the previous questions, try to come up with a rough estimate of how much money you’ll need in retirement on a monthly basis. You should err on the side of caution, by assuming that you’ll need more than you probably will.

Let’s say that you’ll need $5000/month. There are a number of ways that you could come up with that $5000. The easiest way, of course, is to continue working part time. Let’s say you make $1000 per month by working 20 hours per week. Ok, so now we need to come up with $4000.

As a general rule in planning, expect to make about 8% on your retirement investments. Again, this is conservative, and as I mentioned, you should be aiming at 10-12%. But, if you have $300,000 saved @ 8% annual interest, you’re looking at $2000 per month. Get that $300,000 up to $500,000 and you’re looking at $3333 per month. That would put your very close to your goal.

But let’s say that you’re only making $2000 from your investments. What other resources are there? This is where things start to get tricky. You could decide that you’re going to trust the government to provide Social Security. Depending on your historical salary, its not unusual to make $2000-$5000 per month this way. The younger you are, the less you should plan around Social Security.

If Social Security doesn’t get you to where you need to be, you could consider other options like a reverse mortgage on your home, or increasing the amount of time that you work each week. Of course, it may even come down to intentionally cutting back on your spending.

One way or another, there are a number of ways to meet a variety of retirement needs. The key is to be aware of what options you have for 1) making money in retirement and 2) reducing expenses.