What is my retirement number? You may be wondering this yourself. There are so many variables, how can I possibly know how much I need to retire?
The question can be answered easier than you believe. It all comes down to how much you plan to spend in retirement, along with other income sources you have during those twilight years. Let’s start at your retirement spending.
How Much Will I Spend During Retirement
Per Fidelity.com, the average person will spend between 55% – 80% of their annual income when they are retired. This could be high or low depending on what your plans are when you retire.
Do you want to travel the world and live the high life? You will need a lot more than the person who only wants to stay home, spend time with family, and enjoy their garden.
How about debt? Holding substantial debt during retirement will be a huge drain on your savings. Your best bet in being successful with your finances during retirement is to make sure you have all your debt paid off before you go into it. Is it possible to have debt and be retired comfortable? Sure. But I promise it will be a lot simpler to not have those payments drag you down. Plus, not having that $1,000 mortgage payment will decrease your monthly needs substantially, significantly lowering the total amount you need to have saved.
These are the thinking points you need to work out when determining the savings plan you need in order to answer the question of how much do I need to retire.
There are some helpful guidelines that can help you figure out your number once you determine your likely spending habits during retirement. The most talked about is the 4% rule. Let us analyze!
The 4% Rule
The 4% rule simply states that you can withdraw 4% on your retirement savings during your first year of retirement, then continue withdrawing that rate adjusted for inflation each year. By following this rule, you will have a great chance of having enough money for a 30 year retirement.
There are some issues with this rule. First, it assumes you follow the strict rule on withdrawal rates. This may not be right for you. Some years you may need more, while others less. That’s life.
It also assumes a 50-50 split in your portfolio between stocks and bonds. You may have a totally different allocation in your portfolio. There is nothing wrong with that as long as you are comfortable.
Whether you agree fully with the 4% rule or not, you cannot argue that it does provide a start to finding your answers. The method is simple. I want to have $80,000 a year to spend during retirement. Well $80,000 / 4% = $2,000,000. You will need a liquid nest egg of $2,000,000.
Income During Retirement
One variable the 4% rule does not take into consideration is income received during retirement. You will have social security payments. You may be one of the lucky ones with a pension. Perhaps you desire to continue working in retirement by doing something you always dreamed of doing. All of these need to be taken into account when you are determining how much you need to retire.
Take a quick look at the social security calculator provided at the social security website. It will give you an idea on what to expect based off of when you decide to start taking your payments.
I Am Young. How Much Should I Have Saved Now?
There is a simple method to evaluate your current situation and determine if you are on track or if you need to make some adjustments. We will again reference Fidelity which came up with a simple solution to this question.
You should have 1x your annual salary saved by age 30, 3x by age 40, 6x by 50, 8x by 60, and lastly 10x by the age of 67. These are again guidelines and by no means set rules that must be followed. This, like when you plan to retire and your spending rate during retirement need to be taken into account. It is, though, a good start to see if you are on track for your retirement goals.
My Thoughts On How Much I Need to Retire
While the rules mentioned above are good places to start, everyone has their own journey. For me, the 4% rule leaves to much to risk. My goal is to retire far earlier than 30 years before I die. There is too much to do in this world to fit in in only 30 years!
I’ll be honest. I don’t have a specific retirement number that, when hit, will make me walk into my bosses office and hand in my resignation. Instead, I have specific goals that I want to hit each month. Right now, its to pay an extra $2,000 on our mortgage to get it paid off. After that, it will be to roll that payment into our investment portfolio to really jump start our savings.
You have to feel out your personal situation. I desire to see the world. That will increase the amount I need to save. You may want something more or less. That is for you to decide.
Regardless, the rules mentioned above are a great starting point on your journey to determine how much you need to retire. The key is to start. The earlier you start, the longer you will be able to use the force of compounding to get you to your goals.
In Summary
That is quite a bit of information to remember so here is a quick summary of the above information:
- Plan to spend between 55% – 80% of your pre-retirement spending during retirement. The higher you go, the more you will need to save but the bigger security net you will have.
- Knowing what you want your retirement to look like will help you narrow down your estimated spending habits.
- The 4% rule is a great way to start thinking about how much you need to retire. Just take how much you want to spend in a year and divide it by 4%. You will get a great starting point!
- Don’t forget to include other income you will receive during retirement, such as social security, when you do your planning
- The earlier you start, the easier it will be to accumulate the balances you desire. Give yourself the longest time horizon possible!
You have the power to make your dreams a reality. Get out there and do it!