How Much Money Do You Need in Order to Retire?

How much money do you need in order to retire?

That is the central question around which retirement planning and investment advice orbit.

And boy is it a tricky one.

The answer to the question of how much money you need to retire is, It depends”.

Quite an unsatisfactory for most people!

But it's the truth.

There is no “one size fits all”.

It’s not true that if you have 1 million dollars by age X that you can retire.

BUT - just because there is no standard answer does not mean we should not attempt to answer the question of how much money YOU need in order to retire.

I recommend beginning by breaking this question down into 4 smaller questions:

1) How much money will you spend each year in retirement?

It doesn’t matter if you are 1 year from retirement or 30 years from retirement.

You should still do your best to estimate how much you will need to spend each year in retirement.

There is NO RETIREMENT PLAN without having a working estimate of how much you will need to spend once you retire/stop working.

A suitable way to estimate your retirement expenses is to multiply your current annual spending by 80%-90%.

Use the higher number the further you are out from retirement.

It also needs to be said that the younger you are, the more you will need to factor in inflation when estimating your retirement spending needs.

2) How much will you have in income in retirement?

I like to break retirement income into three categories.

• A) Guaranteed income - this is things like pensions, social security, annuities. These are retirement income sources that are guaranteed and reliable and do not require you to PAY YOURSELF.
• B) Variable income - this would be a part time job, or rental property income, dividend income. Any source of income that may fluctuate based on conditions outside your control - but that does not require you to SELL SOMETHING in order to obtain access to the money.
• C) Drawdown or sale of assets - this is taking income via selling something.

3) What will the gap between your income and desired spending be?

The gap is the difference between the amount you desire to spend in retirement, and the guaranteed sources of income you have.

For example if your desired expenses in retirement are $6000 a month and you have guaranteed income from social security of $3500 a month, you have a gap of $2500 per month that must be made up from other sources.

This is critical - because this “GAP” will determine how much you money you need to have in order to retire and meet your retirement spending goals.

Without knowing the “gap”, you have no plan - you are just throwing darts in the dark, flying on a prayer, and placing a huge potential burden on your family and loved ones due to poor planning.

4) Will your portfolio assets be able to support your “Gap spending” for the duration of your retirement?

This is the crux of retirement planning.

Once you know your gap amount - lets say its $1500/month or $18000/year - you should run scenarios estimating how much you will need in wealth or retirement assets in order to support that $18000 a year payment to yourself.

To make this puzzle even more complicated, to anwer this question of whether your retirement wealth can support your gap income you must also sort through the following considerations:

1) How old will you be when you retire?

2) Will it be forced retirement or retirement by choice?

3) Are you healthy or do you have high healthcare costs pre retirement?

4) What state or city will you live in?

5) Do you know how much you’d like to spend in retirement on the “nice to have” things"?

6) Do you have a partner who will share in the “retirement expense load”?

7) Will you and your partner retire at the same time? Will you stagger it over a period of a few years?

As you can see, the process of answering the question of how much money you need in order to retire is a complex one.

It’s no wonder most American’s avoid the subject entirely - it’s overwhelming and feels impossible to tackle.

That’s why retirement planners and financial advisors exist.

If you want to know how much money YOU need in order to retire - you need a personalized plan that accounts for your individual needs and wants.

And you need to interface with that plan on a regular basis with someone you trust, who can guide you through good models and good decisions.

If you’d like to see the main considerations that we use when building a retirement plan for our clients at peak financial planning, you can watch this free training called “The secret retirement plan big finance does not want you to know about”.

You can also schedule a free retirement plan consultation with us using this link here.