We baby boomers are on a roll. More and more of us are approaching retirement age and are asking that age-old question: “How much money do I need to retire?”
And of course, since I’ve been a Certified Financial Planner® professional (CFP®) since 1988, I have the perfect answer every time: “Well, that depends.”
Not only is every person’s situation different, but their health, their attitudes, their risk tolerance, and their worldview are also different.
Let’s start with Social Security. Someone like me, who is 62 years old and has no desire to retire, may want to put off taking Social Security until age 70. And why would I wait? Because my monthly payment at age 70 will be over double my payment amount at age 62. And I plan on living a long time. I had two grandmothers who lived into their 90’s and my parents are approaching their 90’s. If I live that long I’ll be money ahead by having waited the eight years to take the higher payments.
But someone who has saved very little or can’t work any longer may have no other option than to take Social Security at age 62, even though the benefit is reduced for the rest of their lifetime.
And there are people whose life expectancy doesn’t look to be that long. They may benefit by taking payments earlier than age 70 as well.
Then there are your investments. Perhaps you had a 401k or other retirement plan at work. Or you’ve inherited money or saved throughout your lifetime. A “safe” withdrawal rate, the amount you can take out of your savings without running out of money, has been studied by countless experts in this area with a general consensus being 4-5% per year.
This means if you’ve saved $1 million, and you are invested properly, you could safely take $40,000 to $50,000 per year out of your account throughout your lifetime without running out of money. Of course, there are no guarantees in your particular situation that this will work, so ongoing planning is important, but it gives us a starting point to work with.
And, keep in mind, if your $1 million is all in tax-deferred accounts like IRAs, for example, that $40,000 to $50,000 will be taxable leaving you with less spending power.
Also, I don’t believe that most people in retirement will live on less than they are living on prior to retirement. Many so-called “advisors” will project that you can live on, say, 80% of your pre-retirement income when you stop working. But in my experience, some people spend even more in their early retirement years as they have more time on their hands and have been waiting to do things they couldn’t do while working.
And the face of retirement itself is changing. Perhaps we shouldn’t even be using the term. From what I’ve read, about half the people approaching the age of 65 say they will continue to work, at least part-time, after age 65 and that in itself will drastically change someone’s retirement picture. Some are continuing to work because they feel they have to, while others want to remain engaged in the workforce or in a business of their own. Obviously, when you are still earning income, you will be less dependent on savings.
So how much do you need to save for retirement? To get an accurate answer to that question, and create some peace of mind for yourself, talk with a CFP® professional who specializes in retirement planning. Your situation is different than everyone else’s as are your goals and dreams. Don’t rely on some online calculator for something this important.
Many CFP®’s today, like me, can work with you no matter where you live so don’t let geography be a barrier to finding someone you feel will work in your best interests. This next chapter of your life can be the most rewarding chapter when worrying about money is no longer something you need to do.