How to Determine How Much You’ll Need in Retirement?

08/12/2021

How much do you need to retire comfortably?

There is no one-size-fits-all answer. The amount you’ll need to retire depends on a variety of factors — including how much you plan to spend in retirement and how long you think you’ll live.

Still, a recent survey by Charles Schwab, indicated that many Americans believe that $1.7 million is the magic number. A managing director at Schwab Retirement Plan Services said that $1.7 million is a pretty good number based on the median salary in the United States.

However, “if you’re content to live in poverty,” say the writers at Financial Samurai Newsletter,  $400,000 would allow a single person to generate about $8,000 to $9,000 a year. That’s a 2 ½ percent return on investment with no depletion of the principal, very likely a worst case scenario.

How Much do You Need?

You‘ll probably need 80 percent of your pre-retirement income. Experts say you don’t need as much in retirement because you’ll no longer pay taxes toward Social Security, although you may have to pay taxes on your Social Security benefits.

You also won’t be putting money into your 401(k) or IRA. Clothing and commuting expenses should be lower when you’re not working.

Any income you get from a pension or Social Security will help. However, any withdrawals you take from a tax-deferred savings account, such as a traditional IRA or a 401(k) plan, will be reduced by the amount of taxes you have to pay.

The good news is that your money will most likely earn interest and grow. The challenge is no one knows exactly what stocks, bonds or bank certificates of deposit will earn. According to Morningstar, an investment management group, stocks have earned an average 10.29 percent a year since 1926; bonds an average 5.33 percent; and treasury bills about 3 percent. Financial planners caution savers to not be too optimistic and to figure on the low side.

Also keep in mind expenses that might occur beyond housing and food costs:

  • Travel often is the biggest expense the first three years of retirement.
  • Fidelity Investments estimates that the average couple will need $295,000 after taxes to cover medical expenses in retirement, excluding long-term care.
  • Many retirees want to leave money to their children, church or charities.

No one knows how long they will live, but according to Social Security, the average 65-year-old man can expect to live another 18 years to 83. The average 65-year-old woman can expect to live another 20.5 years, to 85.5.

Another indicator of how long you’ll live depends on your parents. If they live until they are in their late 90s, you probably will too.

And, finally, where you live will affect how much money you need. The top least expensive states according to median housing and monthly homeowner costs reported by the American Community Survey include Tennessee, Alabama, Missouri, Kentucky, Louisiana, Indiana, West Virginia, Oklahoma, Arkansas and Mississippi.

For instance, the average cost of a home in the most expensive state in the U.S., Hawaii, is $1,158,492. In Mississippi the median cost of a home is $114,500.

How Much Can You Withdraw Annually?

A landmark 1998 study from Trinity College found that an investor with a portfolio of 50 percent stocks and 50 percent bonds could withdraw 4 percent of the portfolio in the first year and adjust the withdrawal amount by the rate of inflation each subsequent year. Someone with $250,000 in savings could withdraw $10,000 in the first year and adjust that amount upward for inflation each year for the next 30 years. A $1 million retirement nest egg would generate $40,000 a year in income.

Of course, it also depends on how much you plan to spend. If you have $1.2 million in net worth and spend $300,000 a year on expenses and toys, you will need to drastically reduce your spending at retirement. However, someone with $500,000 and only spending $20,000 a year could see their net worth grow significantly in 30 years.

To reach your goal, financial advisors recommend you start young and save 10 percent to 15 percent of your annual salary.

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