Category: Retirement

The Million Dollar Question: "How Much Do I Need to Save for Retirement?"

7/21/2017

Many people think of retirement as the magical day when they no longer have to work. The reality is that retirement is not just a one-time event. Instead, retirement is a phase of your life that could last decades. Part of the challenge of planning is making sure that you have enough saved in your retirement account so you can enjoy yourself without outliving your money.

My Experience with Retirement Planning

In a previous life, I worked as a corporate trainer supporting a group of Financial Coaches in one organization’s Retirement Planning Group. The goal of this team was to help people prepare to retire. This included financial coaching conversations about topics including saving, investment options, health care, and the million factors to be considered when figuring out the logistics of retiring. In addition, we also focused on helping people envision the lives they want to lead, and figuring out what financial resources would be necessary to make those retirement dreams a reality.

Retirement is apparently that-a-way.

A Note on the Use of The Information in this Article

Here is my disclaimer regarding the content in this article. (We all know there has to be one of these just to set the record straight.) The ideas included are for educational purposes only, and should not be construed as financial advice. Concepts covered here are overly simplified examples of basic retirement related information. Please consult a qualified financial professional to learn additional details about each financial concept and to help you figure out what is right for you.

Just Tell me the Magic Number

Now, let’s get back to an often asked question about retirement planning. Many time, when having initial conversations about retirement, people just wanted us to tell them what they perceived to be a very simple question: How much money do I need to save for retirement?

The short answer is—a lot.
The longer answer is—it depends.

One Common Answer

Sometimes, articles on retirement planning suggest a simple answer that even includes an actual dollar amount: $1,000,000.

That’s right. ONE MILLION DOLLARS!

Doesn’t that sound like a CRAZY amount of money? Certainly, if I had a million dollars, I’d be rich—and for sure able to do whatever I wanted in retirement.

One Key Factor: How Long Will Retirement Last

The trick with retirement is that it may last a really long time—think 30, 35 or even 40 years. When we’re working, we get more money every couple of weeks as long as we stay employed. In retirement, though, we start with a big pile of money and our goal is to figure out how to not run out of money while we’re still alive. So how do we do that?

How Much Yearly Income Could You Get from $1,000,000?

One common strategy for attempting to not outlive your retirement money is the 4% rule.

In super-oversimplified terms, the thought is that if you withdraw 4% of your total account value annually, there’s a pretty good chance that you’ll have enough money to last you for 30 years. (Notice that the word “guarantee” is nowhere in this statement. There are no guarantees. There is only planning as best we can and adjusting our plan as we deal with the challenges life throws at us.)

Basically, if you start with $1,000,000 in retirement savings, and use the 4% rule as a guide, in your first year of retirement, you would withdraw $40,000 worth of income. If you’re for real using the 4% rule, you’d adjust what you take out each year based on inflation—meaning that you’ll typically end up taking out a little more each year.

How Much Do You Need?

Translating $1,000,000 into about $40,000 a year puts that amount in perspective. Depending on your lifestyle, you may need to save more, or less, money for retirement. One commonly recommendation for figuring out much income you need is to anticipate that you’ll need to replace approximately 85% of your pre-retirement income. If for example, your pre-retirement income is $50,000 per year, 85% of that would be $42,500. (Again, in this super-simplified version doesn’t consider other sources of retirement income, like Social Security, or inflation.)

One way to estimate the amount you may need to save is to take what you anticipate to be the annual income you want, multiply that number by 25, and use that as your overall savings goal. If, for example, you decide your annual desired income from your retirement account is $75,000 per year, $1,875,000 could be your desired retirement savings goal. (Again, in this super-simplified version doesn’t consider other sources of retirement income, like Social Security, or inflation.)

According to movies, once one has a million dollars, one must carry it around in a silver briefcase.

So Now What?

If you’re not saving anything, start. Even if it’s only $25 per paycheck, save something. If your company has a retirement plan, save money there because it’s easiest and even has some income tax benefits. Even if you think you are way behind, just start. Worrying gets you nowhere. Getting started makes things way better.
If you’re saving something now, try to save more. Up your contribution annually. When you get a raise at work, use some (or even all) of your raise to boost your retirement savings. With company sponsored retirement plans, most people are eligible to contribute $18,000, and possibly more depending on their age.

Learn More

Check out these resources to give you another take on these topics. Don’t take my word for it—keep learning more so you can make the best decision for you.