How Much Do You Need to Retire?

In an ideal world, you would start planning your retirement in your 20s. But that’s often the furthest thing from people’s minds at this point in life. Still, the sooner you can start planning your retirement, the better it will be for you and your loved ones.

Getting Started with a Retirement Savings Plan

A big part of the retirement puzzle is investigating how much you will need to live decades into the future. When preparing your retirement plan, you should consider the following points to help you make an accurate financial plan:

• Your current age
• Your planned retirement age
• Current and future income sources
• What you plan to do in retirement
• What you can afford to save
• Your bills and expenses
• Where you plan to retire
• Family health history

You’ll also need to factor in whether you’re single, married, divorced, male or female. You may also need to consider any caring responsibilities for your parents, as well. Each different situation creates different retirement needs and possibilities.

To keep it simple, let’s look at how you can land on a good number.

How Much Do You (Really) Need to Retire?

Experts have answered this question for years by turning to the Four Percent Rule. The rule suggests you base your nest egg on an annual withdrawal rate of four percent between the day you retire and your death.

Here’s what this looks like: You could spend $40,000 every year pre-tax from your portfolio if you had one million dollars saved. But recently, there’s been debate about the Four Percent Rule. Some experts say it’s no longer fit for the 21st century, which has seen a low-interest-rate landscape. The pandemic’s impact on lending and borrowing means things could stay this way for quite some time, too.

You might start to hear more soon about these alternatives to working out your nest egg in the years to come.

• A Three Percent Rule: Withdrawing three percent of your retirement savings each year may be more suitable for some people. Especially because many of us are living longer after our retirements, the Three Percent Rule may also provide more peace of mind for those who might have higher healthcare costs in later years.
• A 2.5 Percent Rule: Some experts suggest an even more cautious annual withdrawal rate of 2.5 percent. That would mean the same one-million-dollar portfolio for our earlier example would provide about $25,000 of pre-tax income each year.

Of course, you need to work out your income before you can settle on one of the withdrawal rates above or another planning method.

Estimating Your Income

Everyone’s situation is different. But here’s something to bear in mind. Your spending at 65 will be a world apart from your spending at 80. For many, the early years of retirement are when you splurge a little on activities you’ve been dreaming of for years, such as long international holidays.

Once you tick off some of those big plans, you may start settling into a more routine retirement, where the cost of living stabilizes and your expenses follow a pattern. And then, of course, there is the latter part of your retirement, where your health becomes a greater focus.

Planning Your Healthcare

Healthcare is definitely a large piece of the retirement puzzle. Healthcare costs have risen by 65 percent over the past five years, according to the Retirement Healthcare Cost Data Report from HealthView Services. Even healthy retired couples, for example, can expect their health costs to reach $1 million in retirement.

The same report explains that for an average 65-year-old couple who start receiving Social Security payments at 65, healthcare expenses will consume 68 percent of their benefits, leaving far less than many might expect for other living expenses such as housing.

Changing Costs of Living

Retirement planning would be simpler if we all knew the future price of goods. Unfortunately, future growth rates are hard to predict, and this is why you need to think about inflation as you work out your nest egg. Prices of common goods will bounce over a 30-year retirement plan. The US Consumer Price Index shows, for example, that prices rose by 1.7 percent between early 2020 and 2021.

Saving and Investing

But there are many things you can do to bolster your nest egg. Most employers make saving for retirement easy with different 401k plans. Make the maximum allowable contributions into your 401k, if you can. From age 50, you can also make an extra $1000 contribution to your Individual Retirement Account (IRA). This can help buttress your retirement savings.

In a 401k, review your investments for quality and to ensure you have a diversified portfolio. In your IRA, pick long-term investments that can withstand market fluctuations, like those we have seen in recent years.

You could also consider a Health Savings Account (HSA). Contributions to an HSA and any qualified medical expenses are both tax-free — and interest earned is tax-deferred. You can use HSA funds for other expenses, although this may come with penalty fees and taxes.

The Retirement Mindset

Your nest egg goals will come down to your personal tolerance for risk and your expected financial needs in retirement. Both of these factors change over time, which is why your retirement plan should be reviewed at scheduled intervals. A professional that has deep knowledge in tax and estate planning can help you do this.