“How much do I need to retire?” is one of the most common questions people have when they start thinking seriously about retirement.
You may have heard that you need a certain dollar amount saved or a certain multiple of your income before you can retire. Those numbers can be helpful as a starting point, but the reality is that retirement looks different for everyone.
Before trying to come up with a number, it may be better to start with a different question: What do you want your retirement to look like?
Start With the Retirement You Want
How much you need to retire depends heavily on what you plan to do once you get there.
Some people want to travel more, buy a second home, or help their children and grandchildren financially. Others may plan to stay close to home and expect their spending to decrease.
That is why understanding your expected expenses is such an important part of retirement planning. Those expenses may include:
- Housing and home maintenance
- Healthcare
- Travel and hobbies
- Taxes
- Major purchases
- Helping family
Once you have a better idea of what you expect to spend, you can begin working backward to determine how much income your retirement plan may need to provide.
Your Savings Are Only Part of the Equation
It is easy to look at your 401(k) or IRA balance and use that as the measuring stick for whether you are ready to retire. But your savings are only one part of the picture.
Social Security, pensions, retirement accounts, taxable investment accounts, and other sources of income may all help fund retirement.
When that income becomes available matters too. For example, deciding when to claim Social Security or when to begin taking money from retirement accounts can affect both your retirement income and your taxes.
The question is not only how much you have saved. It is also how those assets and income sources may work together once your paycheck stops.
How Long Does Your Money Need to Last?
Another major consideration is how long you may be retired.
Someone retiring at 60 may need their savings to last considerably longer than someone retiring at 70. Of course, no one knows exactly how long retirement will last, which is why planning often involves looking at a range of possibilities.
This is also why reaching a certain account balance does not automatically mean you are ready to retire. Your spending, retirement age, income sources, and investments all play a role in determining how long your money may need to support you.
Don’t Forget About Inflation and Healthcare
Retirement may last 20 or 30 years or longer, and the cost of living is unlikely to stay the same during that time.
Inflation can gradually increase the cost of groceries, utilities, travel, and other everyday expenses. Even a retirement income that feels comfortable today may not have the same purchasing power years from now.
Healthcare is another expense that should be considered. Medicare may cover many healthcare costs once you are eligible, but premiums, deductibles, prescription costs, supplemental coverage, and potential long-term care expenses may still need to be planned for.
Accounting for these costs can help create a more realistic picture of what retirement may actually require.
Taxes Still Matter in Retirement
Retiring does not necessarily mean you stop paying taxes.
Different retirement accounts are taxed differently. Withdrawals from certain accounts may be taxable, while others may receive different tax treatment. Depending on your overall income, a portion of your Social Security benefits may also be taxable.
This means two people could retire with the same amount of money saved but have very different amounts available to actually spend.
Where your money is held can also affect how efficiently those assets are working toward your goals. For example, keeping an appropriate amount of cash available for emergencies and near-term expenses can be important, but holding significantly more cash than you expect to need may mean some of that money has less opportunity for long-term growth than it could have if invested appropriately. Investing involves risk, including the possible loss of principal, and does not guarantee greater growth.
At the same time, investing too much of your available cash could leave you without enough liquidity when an unexpected expense arises. The right balance depends on your spending needs, time horizon, comfort with risk, and overall financial situation.
The types of accounts you use matter as well. Having a mix of taxable, tax-deferred, and Roth assets may provide different options when deciding where retirement income will come from. The objective is not simply to accumulate the largest possible account balance, but to consider whether your money is positioned appropriately for both your current needs and your future retirement.
All of the above factors are important parts of answering the question, “How much do I need to retire?”
What About Retirement Rules of Thumb?
There are plenty of retirement guidelines out there. You may hear that you need a certain multiple of your salary saved by a certain age or that you should plan to replace a percentage of your income once you retire.
These can be useful benchmarks, but they do not know anything about you.
Someone with a paid-off home, limited debt, and relatively low expenses may need a very different amount than someone earning the same income who plans to travel frequently or maintain a higher level of spending.
Instead of building your retirement around a general rule, it may make more sense to build it around your actual expenses, income sources, assets, and goals.
How We Help
We help clients evaluate how much they may need to retire by looking beyond a single account balance.
That may mean reviewing expected expenses, Social Security, retirement accounts, taxes, investments, and other income sources. We can also look at different scenarios, such as retiring a few years earlier or later, spending more in the early years of retirement, or adjusting savings before retirement begins.
The goal is not to predict exactly what the next 20 or 30 years will look like. It is to build a plan based on what we know today and continue adjusting it as life changes.
The Bottom Line
So, how much do you need to retire?
There is no one number that works for everyone. It depends on when you want to retire, what you expect to spend, what income you will have, how much you have saved, and ultimately, what you want retirement to look like.
Instead of focusing only on reaching a certain dollar amount, a better question may be: Will I have enough income and assets to support the retirement I actually want?
That is ultimately what retirement planning is designed to help answer.
Securities offered through Valmark Securities, Inc., a member of FINRA/SIPC. Investment Advisory Services offered through Valmark Advisers, Inc., a SEC Registered Investment Advisor, 130 Springside Drive, Suite 300, Akron, Ohio 44333-2431, 1-800-765-5201.
Velekei Giles Financial Advisors is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.
This material is for informational purposes only and is not intended to provide specific advice or recommendations for any individual, nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. This information is not intended for use as tax advice. Persons should consult with their own tax advisors for specific tax advice.