Retirement is great: But is there enough money?
Calculating how much money you need to retire
Asking the question, how much money do I need to retire? may be the wrong question to ask. The more helpful question is: How much income will be needed each year to supplement my social security and pension so I can live the way I want to?
If you think you might not have enough money saved for retirement, the first rule of thumb is this: Don't panic.
Do, however, understand the retirement equation and develop a plan.
Here’s a look-see at the retirement equation:
- When will you retire?
- When will you die, and if you are married, what age will your spouse die?
- What will the yearly return be on your retirement portfolio?
- How much will you spend each year?
If those four questions are answered with precision, figuring out how much money you need is easy. The problem is that no one can answer them with precision. You can, however, create educated assumptions which will allow you to estimate how many investments you’ll need to support your paycheck in retirement by considering the following questions.
How much income will I need?
You may dream of retiring at age 55 or even 65, but is that realistic? It’s very likely you will live until 90 or beyond. Can you accumulate enough to pay yourself for 35 or 40 years?
What if you expect to work longer, but can’t because of health, lack of employment or the need to care for an aging parent? Will you have enough income?
No one knows when they will die, so throw that variable aside and simply face the fact that you could need an income for yourself and your spouse that lasts until you're in your 90s.
How will the market perform?
We do not know with precision how the market will behave, so again, an estimate, based upon past performance can, at the very least, calm the nerves. Market downturns happen and if you begin taking money from your portfolio without proper planning during a downturn, you could hurt your long-term income prospects.
You must protect and grow your portfolio during retirement. One of the biggest contributors to running out of money in retirement is being too conservative with investments.
As a society, this can be confusing because we may have seen our parents or grandparents buy a house, save money in a bank, make a few investments and become very conservative when they retired. However, previous generations didn’t live as long as those nearing retirement today will.
How much will I spend?
In retirement, as in earning years, spending shifts from year to year. Many spend more the first few years in retirement because there is time to travel, time to spend with the grandkids and time to take up a hobby for which there was no time earlier in life.
Furthermore, spending will grow with inflation. Assuming a 3% inflation rate, your spending will roughly double in 24 years – meaning your initial retirement spending will more than double during retirement. This loose calculation is for basic living expenses only. Later, health care costs may be more than initially imagined.
The bottom line is that there is a lot of uncertainty in retirement, and the whole idea of taking a paycheck from investments is something that most people don’t want to do. After all, they’ve saved their entire life. Starting to take money out feels wrong; it’s scary and it can be difficult to navigate all the issues. Talking to an advisor who stays on top of tax, retirement and investment changes can help ease this fear.
No one book can ever be written on the subject. One has no choice but to plan. Try to get time on your side by beginning to invest in your 20s, and if that ship has sailed, make a plan now. Don't let your retirement investing slide when other financial demands present themselves.
And remember, solutions are possible, but time is the most valuable asset of all.
Disclosure: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please consult your financial advisor regarding your specific situation.
Teresa R. Sanders, MBA, RICP, CFP, is a partner in Aspen Wealth Management, Inc.