How Much Do I Need to Retire? Your Questions Answered
It's literally the million dollar question. Here's what financial planning experts advise—along with the best way to get there.
No more paychecks
Yikes—when you’re asking yourself how much do I need to retire, the reality of losing that regular check can be intimidating. “Many people are used to the comfortable routine of the work week and the predictability of a regular paycheck,” explains wealth management advisor Abigail Gunderson, CFP. “Getting out of a rhythm that one gets accustomed to for many decades of their lives can undeniably cause a lot of stress,”
Work can also be a source of identity and purpose, she says: “Bringing the ‘working years’ chapter to a close can prove daunting to pre-retirees as they face the prospect of the unknown.” Lessen your stress by avoiding the 15 mistakes that can ruin your retirement.
Especially as you creep toward your 40s and your 50s, you might develop more retirement concerns. Gunderson calls these the inevitable “what ifs” that everyone must wade through. But knowledge can fight fear: Explore your current savings, earnings, 401K and IRA plans with an investment advisor.
Gunderson works through these troublesome scenarios with her clients to find solutions for their unique situations. “Projections should always be complemented by an honest discussion that addresses a client’s feelings and expectations of retirement. It will help them find the best path to achieve their goals,” she explains. Here’s the perfect retirement age (it’s not 65).
The first time to ask yourself how much do I need to retire should be the first day you start a full-time job. Gunderson notes that many people delay the saving process until later in their careers—that’s not a good idea. Even the small amounts you put aside in your 20s will turn into significant savings down the road thanks to the magic of compound interest, says Gunderson.
Consider your lifestyle
Before you can truly know the answer to the question of how much do I need to retire, you’ll have to determine how you want to live. Gunderson recommends determining which bills you’ll still be paying in retirement—utilities, cable, property taxes, health insurance, loans. Next, subtract the expenses you’ll no longer be paying—weekly dry cleaning, daily commute costs, frequent meals out. Factor in major expenses like house maintenance, travel, and other splurges you’ll want to spend on. Again, working with a pro can help you account for everything, says Gunderson. For more planning advice, read what these nine retirees wished they had done with their money.
Figure out your post-work income
“Add up sources like Social Security, a company lump sum or pension, and/or income generated by retirement assets saved,” Gunderson explains. Senior wealth strategist Mary Ellen Hancock, CFP, stresses that “understanding your income inflows and expected outflows will enable you to ensure you have the proper asset allocation to make up any shortfall throughout the year. If your income inflows cover 90 percent of your expenses, then your portfolio should be structured so there is enough income to make up the remaining 10 percent.”
The target you’re hoping to reach for retirement is 70 to 80 percent of your current income, according to the American Association of Retired Persons (AARP).
Practice cutting back
Of course, living on a fraction of your former income will take some practice. As you approach retirement age, Gunderson recommends “practicing”—start trying to get by on less money. You could even cut back on hours as you begin to phase out of the workplace. She gives the example of a partner in a law firm who drops her status back to an employee by working fewer hours and taking a pay cut. Or a sales manager who ‘retires’ from his firm but continues to render the same service for two years as a subcontractor. Check out this timeline for sound long-term retirement planning.
Plan for things going wrong
You’ll still need an emergency fund, says Hancock. If the market—or your health—unexpectedly takes a turn for the worse, you may need some extra dough to get you through the lean times or pay off unplanned-for bills.
Definitely seek out help
A qualified wealth advisor or certified financial planning professional can help you make a game plan. “They can help determine how many assets are needed to sustain your desired lifestyle at retirement and how different sources of income can efficiently be integrated to help accomplish your retirement goals,” shares Gunderson. “A professional advisor can also help factor in items such as inflation, age, market return assumptions, and the current tax environment to come up with a more realistic and thorough retirement analysis.” Next, check out the 9 retirement planning steps experts want you to take before 50.