Updated: Jul 13
By far the most common question I get is, "Eric, how much do I need to retire?" In this video, I'm going to answer this age-old question and much more, so stay tuned.
Welcome back to another video from One-Up Financial. I am your host Eric Presogna, CPA, CFP here to help you increase your income, reduce taxes and invest smarter in retirement.
So, how much do you need to retire??? That is the question we're diving into today.
If you look to google or CNBC or your neighbor down the street, you’ll get a variety of different responses. I've heard asset ranges from under $1 million all the way to $10 million. My answer is actually quite simple...you're asking the wrong question.
Well, maybe not necessarily the wrong question but rather asking it out of sequence. That’s because it’s extremely difficult to determine how much is needed to retire without first defining what retirement means. It's like packing for a vacation before knowing your destination.
The unfortunate reality is that most people have no idea what their retirement will look like! They've spent the majority of their lives working and saving, and not enough time thinking about what they're saving for.
So it's OK if you haven't given retirement much thought. If you really want to know how much money you'll need to save for retirement, consider these 4 simple steps that will help you narrow down your number:
1. Know Your Needs
You may think you know what you spend in a given year but I can tell you from personal experience your figures are light! And that’s to be expected as most people neglect to consider EVERYTHING that comes into and goes out of their household like income taxes, Starbucks binging, that old insurance policy you forgot about but are still paying on, door-dash, the list goes on.
To keep things simple, list out all of your outgoing monthly expenses even if they're "discretionary" like going out to eat, buying shoes etc. It's often the case these expenses either stay the same, increase, or are replaced by other, similar costs in retirement.
The easiest way to do this is to login to your online banking portal and download bank statements and/or export credit card spend to excel. I'd recommend pulling a few months you think are indicative of a normal month of household spend and take an average. That is, adding up all ACH deductions, checks, credit card charges (don't count the credit card payments and savings, obviously) for, say 4 months, then dividing that figure by 4 to get an average monthly spend. Finally, multiple that figure by 12 to determine your current average annual spend.
For illustrative purposes, let's say your total annual "needs" spend is $80,000.
2. Ballpark Your Wants
Now, this is the fun part!
Do you like to travel? Do you want to move down south or spend 6 months of the year in Spain?
Time is a precious, finite resource so you'll want to make certain you're spending it wisely in retirement.
To do this, start by jotting down a list of all things you'd like to do in retirement and how often you'd like to do them each year. Next, assign a cost for each and be honest AND generous with your assumptions as it's better to be more conservative than less when projecting retirement expenses as you don't want to run out of money at age 73 because you estimated your annual Disney trip to be $1,000.
To continue with our example, we'll assume annual "wants" spend totals $30,000.
3. Account For Other Income Sources
Next, you'll want to assess your future income sources excluding any investments like a 401k or IRA. By that, I mean take into account any pensions (a rare breed of retirement income), annuities, social security estimates, rental income, etc. that will help fund your lifestyle in retirement.
Now, I wouldn't recommend including income from a business you plan to start or part-time consulting work as there's no guarantee you'll earn anything until the money is in your bank account. Social security and pensions are all-but 100% guaranteed sources of income. The vegan coffee shop bookstore you intend to start is not.
For this, we'll assume you and your spouse will collect social security at FRA (full retirement age) which amounts to $50,000/year.
4. Identify Gaps and a Safe Withdrawal Rate
Lastly, take your other income and subtract your "needs" and "wants" spend. If the figure is $0 or greater, congratulations! You're number needed to retire is a whopping 0!
If you're like most, this figure will often be negative meaning a gap exists.
In our example, that gap is $60,000. So what do we do now?
A man by the name of William Bengen was made famous for inventing the 4% rule, which states investors can safely withdrawal 4% from their investments each year without having to worry about running out of money.
The problem with the 4% rule is that it was founded back in the early 90's and much has changed since then: interest rates, market returns, tax rates to name a few. Further, the 4% rule doesn't account for the unexpected, i.e. large medical expenses that may arise in retirement.
For those reasons and in maintaining an overall conservative approach, let's reduce the withdrawal rate down to 3%.
So if our retirement gap is $60,000 and a "safe" withdrawal rate is 3%, you'd need a portfolio of $2,000,000 ($60,000 / 3%) to "comfortably retire."
What Aren't We Accounting For?
Of course, there are a myriad of factors I didn't cover here that ought to be taken into account in retirement planning: federal and state tax rates, long-term care needs, risk tolerance, asset allocation, charitable intent, legacy planning, small business ownership, I could literally go on for another 10 minutes here.
Really, what we aren't accounting for is that which makes each of us different and unique. It's not as simple as going online, entering a few numbers into a retirement calculator and then coasting off into the sunset. The calculator doesn't know you want to setup trusts for your 3 grandchildren or how to tax-efficiently manage the sale of your fab shop.
We all have dreams and goals, even though they may not be written down on paper. Planning for retirement requires us to think as much about our hopes and aspirations as we do about our finances.
And even if you arrive at your "number" by the time you're 65, that number may very well be different next year, and the year after that because on top of death and taxes, the only other certainty in life is change.
Do you know what's needed for you to comfortably retire? If not, please don't hesitate to reach out to me personally, or leave a comment below.
Thanks as always for taking the time to watch out videos. If you're interested in staying up to date with our market and financial commentary, please subscribe to our blog at oneupfinancial.com/blog, or follow us on LinkedIn and Facebook (or Meta).
Thanks again, and we'll see ya in the next one.