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How Do I Figure Out How Much Money I Will Need to Retire?

How Do I Figure Out How Much Money I Will Need to Retire?

When asked when you plan to retire, you may respond by telling people when you want to retire. Perhaps you’ve always dreamed of retiring at 55 so you have a second career doing something you love. Or maybe you imagine yourself working until 70, then moving to a remote island. Having this sort of dream keeps you inspired. But when you consider your retirement plans, it’s important to focus not only on dreams, but also on finances.

From a financial standpoint, the best answer to the question “When will you retire?” is “When I can afford to retire.

Of course, that answer raises another question: When will you have enough money to retire? In other words, what balance should you show in your retirement account before you can afford to stop working?

Unfortunately, there are no cut-and-dry answers to these questions. How much you need to retire depends on many factors including your age at retirement, where you live, your hobbies, and your other income sources. This is why we always recommend working one-on-one with a Financial Advisor to create personal retirement goals and a plan to achieve them.

With that being said, considering the following factors and guidelines can help you approximate the balance you need to permanently call it quits at work.

The Annual Spending Multiplier

This is a broad, simple way to get a rough estimate of the funds you need to retire. It assumes that you’ll retire around the age of 65, and that you’ll live until you’re about 90. Those are fair assumptions for most people. 

Start by calculating the amount of money you spend annually. Note that this is different from the amount of money you earn annually. Right now, you likely save a significant portion of your income, and that won’t be the case once you retire.

Multiply your annual spending by 25. For example, if you spend $35,000 per year, you would multiple $35,000 x 25, which equals $875,000. That’s approximately what you need to have saved to retire, assuming you plan on withdrawing 4% of your funds each year. (This is the average withdrawal recommended across the personal finance industry.)

As you can tell, this method of estimating retirement savings is pretty crude, and it makes a lot of assumptions. For example, it assumes you’ll keep living the same sort of lifestyle once you retire. Not everyone does. It assumes you’ll live for 25 years post-retirement. Some people live longer, and others pass away sooner. It also assumes you won’t be earning any income in retirement — and many people these days do work part-time or have a side hustle post-retirement.

Key Considerations

If you want to estimate the funds you need for retirement more accurately, there are four key factors to consider. Your Financial Advisor can convert these factors into numbers and calculate exactly how they impact your retirement savings plan. For now, focus on how these considerations apply to your own life and goals.

Property Ownership And Sale

Aging in place — staying in your current home through your retirement and old age — is becoming more common. However, many people still choose to sell their current homes and downsize when they retire. If you have a lot of equity in your home, that will factor into your retirement savings goals. You may be able to retire with less since you’ll have the equity to spend after selling.

If you don’t own property and rent, this will also affect your retirement needs. Rent increases over the years, whereas payments on a fixed-rate mortgage do not. If you plan on renting in retirement, you’ll need to take the increasing cost of rent into account, which means you’ll need to save more than your peers who own homes.

Cost Of Living Changes

The cost of living varies greatly from state to state, and even from city to city in some cases. If you plan to move once you retire, you need to consider how the cost of living in your new locale compares to your current cost of living.

If you retire and move to a low-COL area, you may be able to retire with less “in the bank.” On the other hand, if you move to a high-COL area, you’ll want an ample retirement account to make up for the difference.

Expected Medical Costs And Insurance Availability

Unfortunately, old age comes with an increase in health problems and medical expenses. Health insurance plans vary greatly. Some cover almost all of your medical costs, while others leave you to pay a lot out-of-pocket. As such, it is important to consider your medical expenses and how they are paid as you plan for retirement.

A Financial Advisor may help you set up additional investment accounts, such as a Health Savings Account (HSA), in order to reduce your medical expenses and prepare yourself for future costs. Making a plan for future medical expenses early on often allows you to safely retire sooner or with a smaller account.

Plans For Future Work And Income

Some people want to retire and never work again in any capacity. Other people find the idea of ceasing to work almost jocular. They want to retire, but for them, retirement means only working on projects they love. Or, it may mean switching industries and doing part-time or gig work they’re passionate about.

In any case, if you plan on continuing to earn an income in retirement, this will impact the amount you need to save. However, it’s important to remember that part-time and hobby incomes are not always as reliable as you’d hope. Saving more than you think you need is often wise, even if you have grand plans for a second, post-retirement career.

Of course, calculating how much money you need to retire is just the first step. Once you have a number in mind, you need a savings and investment plan to achieve that goal. How much you invest each month and where you invest it will make a huge difference in how soon you’re able to achieve your goal balance and tell your boss “goodbye.” These are all steps that your Financial Advisor can walk through with you.

Are you looking for a Wealth Manager or Financial Planner to help you set and clarify your retirement goals? Contact RLJ Wealth Management to schedule a consultation. Our client-led approach helps you feel comfortable and in control of your finances every step of the way.