How Much Do You Need to Retire with Confidence?

How much do you need to retire with confidence? Is there a magic number? Let's explore how much is enough and how you can achieve your goals.

Do you have a “magic number” that will allow you to retire with confidence?

Is $1 million enough? How about $2.5 million? Or do you need as much as $5 million to support the retirement lifestyle you envision?

Two of the most common financial questions asked by working-age people are:

  1. When can I retire comfortably?
  2. How much money will I need to save to do it?

The only honest answer we can give is – it depends. But that’s not very helpful, is it? So, instead of providing some magic number, we offer some strategies, goals, options, and formulas to consider so you can figure out what works for you.

It’s Never Too Early To Start Planning

Retirement planning is certainly not a one-size-fits-all proposition. Your circumstances are unique, and identifying your goals and preferences will help shape your path to a successful, comfortable retirement.

Here are some of the questions you need to “guesstimate” about your retirement:

  1. At what age do you want/plan to stop working?
  2. What income streams will you have when the weekly paychecks stop coming in?
  3. Will your expenses be higher, lower, or about the same as before you retired?

The single biggest variable – and the hardest one to plan for – is longevity. How long will you live? Since none of us know the answer to that, it’s wise to plan that you will live to at least the age of 90 or even 95. We all wish for a long and healthy life, and you don’t want to outlive your savings.

The United Nations estimates that by 2050, the number of people who live past 100 will be six times greater than it was in 2022!

Your Retirement Age May Matter

There’s a big gap between when active workers expect to retire and when retirees say they actually did. A recent survey by the Employee Benefits Research Institute (EBRI) found that workers say they expect to retire at age 65, but in reality, retirees report they stopped working at a median age of 62. The discrepancy is often due to an unexpected hardship, such as health problems or a job loss.

Still, the longer you stay in the workforce, the bigger your nest egg. It also gives your savings a longer time to grow. Currently, the Full Retirement Age is 67 for most Baby Boomers (anyone born in 1960 or later). This is the age at which you can receive full Social Security benefits. Claiming before your Full Retirement Age may result in reduced monthly benefits.

Income in Retirement

Just because you no longer have a regular paycheck doesn’t mean you don’t have money coming in. Social Security, of course, represents a nice chunk of change for most people. You can check on your expected benefits by activating your account at www.SSA.gov. You can start collecting as early as age 62, but the longer you wait (up until age 70), the more you collect each month.

Other potential income sources include pensions, rental income, part-time employment, dividends and interest on your investments, and withdrawals from your IRA, 401(k)/403(b), and other savings accounts.

Calculating Expenses

Calculating expenses can be a straightforward process. Begin by documenting your expenses for an entire year — both fixed expenses like your mortgage and variable expenses such as groceries and entertainment.

Next, identify expenses you will not have in retirement (such as the cost of commuting) and determine what new expenses you may have (such as more frequent travel and entertainment). Don’t forget about annual expenses (i.e., streaming service fees, vacations, and golf club dues) and emergency expenses. You’ll also need to account for income taxes and healthcare, which can be two of the biggest expenses in retirement as you age. Remember, if you retire before Medicare kicks in at age 65, you’ll need to pay out of pocket for COBRA or a private insurance policy, which can be quite expensive.

Understanding how much money you’ll need is critical to the success of your retirement plan.

For some, your expenses may be greater than your sources of income. In that situation, you’ll need to determine how much you can withdraw from your investment accounts without the risk of running out of money. If you work with a financial planner, they can help you determine a safe withdrawal rate.

Remember, planning your retirement isn’t just about the numbers. You want to be realistic but also have fun envisioning what you want your retirement to look like. Do you plan to travel often? That can be expensive. Do you prefer to stay close to home and spend lots of time with the grandkids? That may be less costly.

Your final step is to ask yourself: Are the two sides of the ledger roughly in balance, or is there a significant funding gap? If a gap exists, you may have to re-imagine what your retirement will look like and how much it will cost, or find a way to increase your income by working longer or taking a part-time job.

How To Prepare for Retirement

The single best piece of advice we can offer is to start saving for retirement early. Save early and save often. Your earnings will increase over time, and you’ll benefit from the power of compounding.

For young people who begin saving early, there may be additional things you need to save for, such as saving for a new house or wanting to pay for your child’s college education. It’s important not to neglect your retirement savings, though. You can ultimately get a loan to help with a home purchase and college tuition, but you can’t get a loan for retirement.

Rather than trying to dial into a specific number, consider setting up a percentage goal, such as saving 10% of your take-home pay. Each year, increase your savings goal by at least 5%, so in year 2, you are saving 10.5%, and in year 3, you are saving 11%, and so on. This strategy works well because not only is the percentage saved increasing annually, but as you earn more money, the amount you contribute naturally increases as well.

Bottom Line: How Much Do I Need to Retire?

We human beings love to compare ourselves to others, so let’s see how we compare regarding retirement savings. The average respondent in this year’s Charles Schwab Retirement Survey felt that $1.8 million was the magic number needed to retire. Most of them (86%) felt they were on track to achieve that goal, even though that may be an unrealistic leap of faith.

Another survey by the insurance company Northwestern Mutual found that Americans think they will need $1.25 million to retire comfortably.

The good news is the number of 401(k) millionaires is on the rise. The mutual fund giant Fidelity says nearly 800,000 of its retirement savers had seven-figure balances as of June 30th of this year, up nearly 25% from the beginning of the year. One common denominator for these 401(k) millionaires is they socked away about 17% of their income each year, and their employers contributed another 9-plus percent, bringing their total savings rate to 26.5%.

Becoming a millionaire is an impressive financial milestone, but $1 million today isn’t what it used to be. One million dollars back in 2003 equals more than $1.66 million now to have the same amount of spending power.

Life is both expensive and unpredictable. It’s fine to dream big, but it’s crucial to be realistic when it comes to planning for your long-term financial future.

Feel free to contact an EKS Associates advisor if you wish to discuss your retirement plan.

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