I really dislike this question. It’s the marketing title of so many articles and other media sources that want to catch one’s attention and educate the intended audience- and often sell them their related financial product. It goes right along with similarly related marketing click-bait: “Will I run out of money before I die?”
Guess I should just get over my negative reactions to such leading questions. As long as one understands there’s a good chance this is a marketing ploy, then what’s the harm in reading on? After all, there’s just as much chance it’s a lead-in to a very useful resource designed to educate, or go through a useful thought process in prep for retirement.
So now that I’ve gotten over myself…just how much $$$ does someone need to retire? It’s a legitimate question. And I’m not trying to sell you anything. The initial answer, of course, is “It depends” on a bunch of factors. The very nature of the question assumes someone is saving and growing a nest egg, or is working towards building a monthly retirement money stream (a pension, or an annuity), or both. Some questions to answer along the way to help determine that “bottom line” figure include:
(Pause for the obligatory disclosure that I am not a certified financial planner or investment professional. This is pretty much for entertainment and basic education. And I don’t receive a dime for anything showing up on this blog.)
- How much money do you spend per month right now, before retirement? And how much money do you think you’ll spend per month once you retire (Oh, this sounds like a lot of work…..)? If you don’t know, you might want to seriously consider tracking expenses per month for a while. Then come up with an estimate of what you’ll spend per month after you’ve retired. No sense going any further in the retirement decision-making process until you have these two estimated figures. But read on.
- The retirement monthly expense estimate is something for which you might consider enlisting some external support. A financial planner would be very helpful thinking through expenses you might not consider on your own. There are also several good online resources that would help such as: https://www.thebalance.com/how-to-estimate-your-retirement-expenses-2388830
- How much travel per year might you be doing, and how long into your retirement do you think you’ll be traveling? Have you factored in Medicare (for two) and other medical expenses sure to increase with age? Planning on pursuing any expensive hobbies, or funding grandchildren education, or supporting parents, or legacy giving? Long term care expenses? Federal/State/Local taxes? Bottom line- how much you spend per month at the beginning of retirement will be quite different 10 and 20 years later. That’s before factoring in inflation.
- Risk factor to consider– best to overestimate your potential monthly retirement living expenses at this stage since you’re probably trying to determine the minimum amount of resources required for retirement. More on risk a little later.
- How much income, if any, will you (and spouse) have once you retire? Will you have one or more pensions, or just a retirement nest egg from which to draw? Or both pension and nest egg? If you have pension(s), are they tied to annual cost-of-living increases?
- Will you (and spouse) have Social Security benefits? If so, do you plan on starting those payments at the minimum age (62), at full retirement age, or at the maximum benefit age (70)? This subject is worth going through separately. See Post #15.
- Have you planned for Required Minimum Distributions (RMD) to be available at about age 72 (a later age with the latest tax law changes)? If you don’t know what RMDs are, look back at Post #19 for a quick education.
- Are you considering doing part time work, or starting a money-making business in retirement?
- Are there any other sources of income available to you now or after retiring?
- Don’t forget to factor in Federal/State/Local taxes.
- What to do with your retirement nest egg during retirement is a subject worthy of it’s own post (or book), but here are some basic considerations:
- If you have no pensions coming in and are planning on your retirement nest egg to cover some, or all, of your monthly expenses, here are some planning factors:
- Look up the financial term “Four Per Cent Rule” on Google, YouTube, or any financial planning resource. This too is worthy of a different post (update- see post #55 on the Four Per Cent), but the general guideline is that based on historical data, if you withdraw 4 percent of your retirement nest egg each year, you will not exhaust this resource in your lifetime (assuming you don’t withdraw beyond the 4 per cent during retirement). One of many follow up questions: will an annual 4 per cent withdrawal be enough for you to live on? If you have a $1.0 million nest egg, that equates to $40,000 the first year.
- Beyond that first year of retirement, what equates to 4 per cent all depends on how the nest egg grows/shrinks during the following year. If the nest egg is tied closely to U.S. stock markets, historically the nest egg will replenish itself back to $1.0M, or more each year (insert standard disclaimer blurb here that investments’ past performance is not indicative of future results…..). But if the nest egg shrinks significantly (like it has in the first half of 2022), 4 per cent will equal something considerably less than $40K. In either case, if you stick with the 4 per cent annual withdrawal rate, you should not exhaust your nest egg in your lifetime.
- A good 4 per cent rule explanation: https://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
- (By now you should be thinking that the answer to the original question, “How much money do you need to retire?” constantly changes, which is one reason why I dislike the question……)
- If you have pension(s) for retirement, you have more flexibility for managing finances- congratulations. You still have to determine what to do with your nest egg, especially if pension(s) aren’t going to cover monthly retirement expenses. The comments above regarding your nest egg apply.
- As part of the planning process, make sure you research exactly how much you’ll receive monthly after withholdings. It’s not uncommon for an advertised pension of $2500 per month to shrink below $2000 after withholdings.
- If you have no pensions coming in and are planning on your retirement nest egg to cover some, or all, of your monthly expenses, here are some planning factors:
Now’s a good time to revisit risk. Each individual has a different risk factor which will influence the amount of retirement resources a family will be comfortable with going into retirement. Some will want to retire as soon as this minimum resource level is reached, while at the other end of the risk spectrum, some won’t be comfortable stepping into retirement without a couple spare million dollars stored away. Risk tolerance alone may mean retiring with as little as 500K (or even less) or at least $5M being available.
OK, this should get you well down the path of figuring out the answer to the title question. There’s a whole lot more to consider in this process. Then again, there’s a whole lot more posts coming to this blog addressing such considerations.
Most of you reading this post are probably retired already and have run through all the leading questions designed to get to an answer to the title question. If you haven’t reached retirement, and are looking for good resources for retirement planning, try this entertaining website:
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So, how did this decision making process work out for us in our transition into retirement?
- In the runup to our retirement decision, we had to include a few extra considerations: we were building our retirement home while I was still fully employed; we were going to move to the retirement home (600 miles away) immediately after retiring; we considered moving before retiring and working remotely for a year from our retirement home, but ultimately decided against that. All these considerations are described in earlier posts.
- We had two lifetime pensions available, plus we were building a retirement nest egg. The goal was to live on the pensions and not touch the nest egg until we had to via the RMDs at age 72. Hopefully the nest egg would continue to grow steadily.
- We also wanted to wait until both Beth and I reached 70 years of age before touching Social Security.
- After doing the math described earlier, it was clear our monthly retirement expenses were going to exceed our two pensions by roughly 10 per cent. I considered some part time work options to cover the negative monthly cash flow.
- In August 2021, the retirement house was on track to be completed before the end of the year, so we decided I would retire at the end of 2021 and we’d move from DC down to the retirement home in Tennessee.
- In early January 2022 we made the move and began tracking our monthly retirement expenses. Turned out that over the first six months expenses were exceeding our pensions by about 20 per cent. Also, our nest egg was getting steadily smaller during this period (we weren’t pulling anything from it). Time to consider some adjustments.
- Beth and I both took on part time jobs to reduce the negative monthly cash flow. We can also reduce our expenses somewhat, although most expenses are fixed. We haven’t had to dip into the nest egg yet, but that’s an option. Another option being considered is to start my Social Security now instead of waiting to turn 70. That would immediately turn the negative monthly cash flow into a solid positive cash flow.
As you can see, the original question doesn’t go away after retirement starts. We are eight months into retirement and planning continues, as do the adjustments.
Feel free to comment. It’s been at least two months since this blog’s received any comments.