How much money do I need to retire? This is a question that we will all ask at some point. This question does not have a singular answer. There is no “MAGIC” dollar amount that you need to accumulate before giving the green light to your retirement. There is only “YOUR NUMBER”! The amount that you need in your investment accounts is specific to your unique situation. It’s not a one size fits all answer… but there is a simple process that we can all follow when asking this question.
First… I say “INVESTMENT ACCOUNTS” because the reality is that the majority of retirees will remain invested for the remainder of their lives as the cost of living will continue to rise. Your goal should be to maintain your current lifestyle in retirement; so the logical answer for most people is to STAY INVESTED. This way you can combat inflation and keep up with the increased cost of living.
The way to determine the amount of money you will need is done by working in reverse… or as some will say; by reverse engineering it! This simply means to work backward. If you are pondering if you can retire here is the simple process that we follow:
Step 1: Determine the amount of money you spend each month on your total living expenses. Figure this number before taxes. Add a little cushion for unexpected expenses. If you struggle to know how much you spend each month, our PureVest Monthly Expense Worksheet is a good starting point.
Step 2: Analyze all recurring income streams. This is where you look at your pensions, annuity payments, rental income, royalties, or any other income you will generate in retirement.
Step 3: Next turn to your Social Security. For a lot of people, social security will make up a majority of their income in retirement. By working with your financial advisor you can determine the optimal time for you to start claiming benefits.
Step 4: Your investment accounts are there to bridge the gap between your answer to Step 1 (how much money you need each month) and the sum of Step 2 and 3 (your total recurring income). The key is to have a low withdrawal rate each year from your investment accounts so that you do not overspend and outlive your money. More on this below but let’s take a look at some numbers to give you a hypothetical example:
Hypothetical Example:
Monthly Living Expenses: $10,800
— Recurring Income (Pension): $2500
–Monthly Social Security Benefits: $3400
Total Income: $5900
Total deficit: $4900 *Monthly living expenses ($10,800) minus recurring income and social security ($5900).
In our hypothetical example, this retiree would need to be able to withdraw $4900 a month from their investment accounts each month at the start of their retirement. This number will increase each year as the cost of living rises. You may be familiar with the 4% rule in retirement; which says you can withdraw 4% of your account each year and not run out of money for 30 years. This number was actually 4.6% when the research was done in the ’90s. However, there is more to it than a blanket 4% or 4.6% number across the board. Factors like age, current inflation numbers, and how you are invested will change this percentage for you. This number can vary from 4-6%; or even higher.
So, if the above retiree had between $1,000,000 and $1,500,000 in their investment accounts they would be sitting in good shape because it would leave them with a respectable annual withdrawal rate form their portfolios. Financial plans are not etched in stone; they are monitored, reviewed, and updated each year.
A key part of the financial planning process is to look at the data above and then stress test it against the market. Before having the greenlight to retire your numbers should be tested against a variety of potential market returns. It’s reasonable to expect a long-term average return of 10% in the markets (based on history), but the sequence of the annual returns is unpredictable and will affect your money as you start drawing on it. We test our financial plans against 1000 hypothetical sequences of returns in the market. This can only be done via financial planning software. I think it’s important to note that the above is just a 10,000-foot view of how we determine if a client has enough money to retire and maintain their lifestyle. Some other details and factors that come into play are taxes, age, other assets, savings and checking account balances, life insurance, etc…
The reason we put this blog post together was to help you get a quick gauge of how close you are to retirement. Many people currently have the means to retire but don’t realize it. This simple exercise above can help you get a good gauge as to where you stand. Knowing these numbers will also allow you to mentally handle market volatility better, as long as you are on track with your long term goals… Or it will let you know that you need to increase your retirement savings to get on track. This post is just a broad overview so if you have any more questions on this topic, or want a review of your financial situation please reach out to us.