How Much Do I Need to Retire? Or What’s “MY Number” Part 3
Who can tell me how much money I need to retire? The question everybody wants an answer to!
How much do I need to retire, Part 3
In Part 3 of “How much do I need to retire? Or, what’s MY Number?” I’m going to continue to lay the groundwork by providing some details to the questions I asked in Part 1. Remember what we’ve previously discussed: That is, developing financial goals and achievement plans is one of the hardest things you will do. If you are a bit behind the power curve, or even if you are not and are married, finances and financial topics can be emotional. I want to help reduce the burden of this challenging task, so you can have peace of mind knowing you are on a path to financial freedom. Why spend the next 40 years HOPING you get there, when you can KNOW?
The questions
As we prepare to zero in on what “MY Number” is, there are a few key considerations we must take into account. This may not be a comprehensive list, but it will certainly be an excellent start. I listed these questions in Part 1, and I’d like to repeat them here, then proceed to dissect them. The topics:
The common belief is that you need roughly 80-85% of your pre-retirement income once you retire. Why?
Assumes the same lifestyle as when you were working.
Assumes your home is paid off.
Assume you will make no more retirement contributions.
You will likely have increased medical costs. This could be from increased medical needs or the cost of insurance. Medical costs are a huge wildcard in retirement.
You likely will have increased leisure costs, at least initially.
You likely will experience a decrease in some other costs, such as commuting.
It also depends upon your sources of income and debt.
I’d like to see you with at least a three-legged income stool: Pension, SSA, 401K. Ideally, a four-legged stool with passive or other investment income, such as real estate.
Then the question is, what debt do you have at retirement? Ideally, you would have none, but increasingly, people have mortgages, credit cards, car payments, or even student loan debt.
If you are a dual-income family, it’s important to know what will happen when one of you passes and how it will affect the surviving partner (Note 1).
Taxes in retirement- This is a big unknown and can really hurt you.
What do you believe your taxes will be? People often assume they will be less, but that is not always true. If you find yourself widowed or otherwise single, you could be in for a big surprise when it comes to taxes.
Let’s take each question one at a time.
The common belief is that you need roughly 80-85% of your pre-retirement income once you retire. Why? As I write this, I left full-time work (I prefer not to use the word 'retired') six years ago. As such, I’m fairly qualified to tell you what you will and won’t need in retirement. Like Jim Stovall (Note 1) likes to say, “Never take advice from someone who does not have what you want.” So, because I’ve successfully transitioned into retirement and living it pretty much as I planned to do over the past 40 years, you can take this bit of advice I am going to give you is accurate.
80-85% of your income on the day before you retire is a good number to shoot for. However, there is a problem that you need to compensate for and it hits you directly in the face as the first thing that you do. Here's the question: If you're 30 years old, making $100,000 a year, and want to retire at age 60, do you aim for a retirement income of $85,000? You can immediately see that you will need to start making assumptions. These assumptions include what your career path will be and how much you anticipate making at age 60 when you retire. Indeed, (I hope at least) you will have a few promotions in front of you with the resulting pay raises and other annual raises to help you keep up with inflation. You don’t know what inflation will be for the next 30 years (although there are guides that can help you). Will your house be paid off? Will you have any debt? What will medical insurance cost me? What will taxes be (they may even be higher in retirement!).
So you see where answering this one question is difficult. I’ve not even discussed all the “free” advice you get every day that tells you “Save 15% of your income. Invest in gold to protect yourself. If you have $100,000 saved, call us for free advice today. Use whole life insurance as part of your financial plan. Get an annuity!” Let me just say you should be very careful of anything like this you see. Very careful, as in run away quickly!
My standard disclaimer is that your financial advisor can help you with all of these questions and should be a trusted partner for you. That said, I will tell you that if you have planned your career out well (Yes, I’ll help you with that down the road. Or take the course today, or buy the book) then knowing what your projected final position and projected income will be at your projected retirement date, then if you shoot for 80-85% of your pre-retirement income is, you should be fine. In my case, that’s what I did, and we are actually living on less than that. Yes, overshooting your estimate of what you need is a sweet spot. On the other hand…Expenses in the near post-retirement can be higher than usual. Pent-up travel desires, home repairs, and other unexpected costs can cause your spending to exceed your projected income amount. Also, should you suffer health issues at any time in your retirement, it can cause you financial strain. How much are you budgeting in retirement for medical expenses? See Note 2. How about long-term care? See Note 3. Regarding long-term care, do you purchase insurance or self-insure? You may or may not need it, you know. See where this is going?
Right about now, you are probably quite stressed to hear all this news. Don’t be. Remember when you purchased your first home and were at closing, where you saw two legal-sized sheets with numbers running down the right side, detailing your closing costs and monthly payments? You asked, “How am I going to be able to afford this?” You did and probably did well. It will be the same here, but you need to do your homework to get it right.
Here's what I’m going to say. Stay with this, don’t get frustrated or upset, and DON’T quit. I really do suggest taking the course (a bargain at $89.00, reading the book, a bigger bargain, and continuing to follow these posts). Once you meet with your financial planner, I believe he or she will tell you that 80-85% is a good number to shoot for.
Oh, I almost forgot, and it’s a big one. Do you plan to spend down your retirement savings or live off the income generated by it? Yes, this is a significant topic for you and your financial advisor to explore. Let me just say that most people need to spend their retirement income down because they simply don’t have the financial resources to do otherwise. A fortunate few (and I’d like you to be one of these) can live off investment returns and keep their principal intact. There are a lot of reasons for this being the desirable course to take. One reason is that the worst could occur during your retirement (zombie apocalypse, war, recession, or depression), and having your retirement principal intact could save you from significant financial problems.
It also depends on your sources of income and debt. We’ve briefly discussed debt in the above paragraphs, but let me dig a little deeper. Standard advice is that your house should be paid off when you retire. If you have a low-interest mortgage loan, say 3.5% (or even less), it may be better to carry that loan into retirement, assuming you can afford it. If you are earning a good return on your investment, you may be making more than 3.5% off of it, so it may pay to keep the loan. Another consideration is this: Once you pay off that loan, assuming you do with investment income before you retire, you lose the liquidity you had with the money invested and may not be able to get it out of the house at a reasonable rate. If the value of the home should go down, that’s an even worse problem. Of course, if things work out well for you, your house is paid off long before you retire and this is not even a discussion topic for you.
You’ve heard me say that I would like you to have a three or four-legged stool in retirement income. This simply means I’d like you to have three or four sources of income so that if you lose one, the remaining legs can carry you. What are these legs? Typically, they are: Social Security, Pension (if you have one), Investment income (from your retirement account(s)), other taxable savings (if applicable), passive income (such as real estate, if you own it), and, if you choose, post-retirement income from working.
Unless you have a pension that is paid by your company, union, or government where you work, you will need to take care of the other sources of income. Real estate is a long-term investment, so if that’s something you’re interested in, start early in life.
The fact is that today, most families are dual-income, and that’s what it takes. Or, let me say, that’s how couples choose to live. Can you live on one income, like my parents did in the 1950s and 1960s? I think the answer is yes, your wants and desires need to be tempered, and the single source of income should be of a sufficient amount to cover you and your family's needs, whatever those may be.
Taxes in retirement. As I did with Social Security and Medicare, I will dedicate a special post to this topic due to its sheer magnitude and importance, so stay tuned for that discussion. That’s all for this week!
What’s in it for Me
We all want financial security, don’t we? Rather than leave it to chance, let’s get on a path so we can know for certain! And that’s what’s in it for you this week!
Call to Action
Review the previous post on How much you need to retire, as well as posts on templates, if necessary. Hopefully, you have begun to think about how you want your final financial template to look and are getting a general idea of what “Your Number” should be. That’s a lot, but now is a great time to ensure you are up to speed so you can benefit from all of these posts.
Recommended Resources
Besides the references in the notes, I’m just going to say please visit with your financial advisor as soon as you can to begin these discussions. If you don’t have a financial advisor, then figure out how to find one you trust.
Up Next
Taxes in retirement.
Notes
Please note that as an Amazon Affiliate, I may earn a small commission on the sale of any of these recommended resources.
Jim Stovall: https://www.jimstovall.com
How much should you budget for healthcare in retirement? Creative Planning: https://creativeplanning.com/insights/financial-planning/budget-healthcare-retirement/
Calculate the cost of long term care near you. Genworth: https://www.carescout.com/cost-of-care