How Much Do I Need?
I am constantly asked… how much do I need for retirement? There are rules of thumb all the way up to sophisticated models that we use to find the correct amount.
Obviously, there are some basic information that one must understand. When one retires, they are usually at their lifetime’s highest income. Most recent studies (and a rule I have always used that is successful) show that you will need about 90% of your preretirement income during retirement.
Some people balk at this claiming they will only need 50% of their income as the kids have moved on, mortgage is paid off and they won’t need to commute. Well, how many times in your life have you already retired? You see what experience do you have? First off, remember the income and lifestyle you were living say 20 or 30 years ago? Could you go back to that lower income and lifestyle? More importantly… would you? Next, whenever you have paid off a debt (car or credit card loan), what happens to that money? Have you really saved it or do unusual expenses always eat it up? What do you think happens when your mortgage gets paid off? The same thing!!! One other item is your health expenses and premiums skyrocket during retirement to easily 8-10 times what you currently are paying (since your employer usually subsidizes a large portion of your health premiums).
With that out of the way, now answer me… how long will you live after retirement? Seriously!! That has a huge effect on the number needed. Hmmm. You have life insurance to protect if you die early, but, we are trying to plan for you not dying early.
Say your preretirement income is $50,000 per year. Using the 90% factor, then, you will need $45,000 in the first year of retirement. (We will cover the inflation factor very soon). Now the sad part is that the average baby boomer has about $50,000 saved for retirement. Ouch!
The sophisticated studies show the “safe” withdrawal rate from your retirement account (savings) should be about 4.5% for the first year (and then increased for inflation each year). This will assure an almost certain likelihood the portfolio will be able to provide income for 30 years. This assumes a portfolio mix of 60% stocks and 40% bonds. So, to fund a first year income stream of $45,000 with a 4.5% withdrawal rate, you will need a $1,000,000 portfolio at age 65.
Okay, you now have a simple formula to extrapolate how much more or less you need based on your current income.
If you need some ideas on how to build up your retirement nest egg, please contact us at founders@goundersgroupinc.net. For additional reading on this, go to the Kitces report at www.Kitces.com.