How Much Will You Need to Retire?
There's no magic number to planning a secure retirement.
— -- The stereotype for retirement is people spending their time fishing, gardening, horseback riding or playing golf — and not doing much else.
The classic idea of retirement is a life of uninterrupted leisure is evolving. With people living longer, they’re more active in the early years of retirement, and many choose to focus this energy on a retirement lifestyle that’s much different than the stereotype. In this kind of retirement, people may do volunteer work, start a new business (preferably one that doesn’t require a lot of capital), take care of their grandkids during the day or work part-time to stay busy.
Of course, many retirees work part-time to reduce the strain on their savings. So how much do you need to retire?
In 2006, Lee Eisenberg published a book on the subject titled “The Number,” which has prompted many to ponder how much they’ll need. Today, financial services companies run advertisements saying you should know what this number is. While this may be a bit oversimplified, it has some validity.
The resources needed for retirement vary widely with individuals and their circumstances, but there are some established ways of estimating how much you’ll need and how much you can spend:
- Retirement income — from all sources, including an investment portfolio that you’ll gradually cash in during retirement — can be expressed as a percentage of the final working income (less than 100 percent because you’ll be drawing Social Security and possibly other retirement benefits, such as pensions). Estimates of this percentage tend to range up to 85 percent. If you’re paying a lot of greens fees and going on a lot of cruises, you’ll probably need the full 85 percent, if not more. But if you’re involved in a post-career pursuit that you not only love but also bring in some money from, such as working as a photographer, then you may be able to get by all right with less.
- The multiple of your final working income that you should have saved by the time you retire. One rule of thumb puts this multiple at eight times your final annual income. According to this, if you’re earning $75,000 on the cusp of retirement, you’d need a nest egg of $600,000. This rule is based on the concept that most people’s spending patterns don’t tend to change much. If you cut way back on expenses during retirement, you may get by with a lower multiple. But if you go gaga, using your new-found free time to spend, that’s another story.
You can take control of these variables by setting a retirement budget that’s based on realistic goals, and steadfastly sticking to it. Remember that if you’re counting the value of your pre-retirement home toward the total wealth you can spend during retirement, you can’t gear your budget to allow more spending just because you sell it and move into a less-expensive home (like a condo in Florida).
- Withdrawal rate. This is the rate at which you can spend your nest egg without running out of money, expressed as the annual percentage of your total resources that you can spend each year. Much has been said and written about this measure in recent years, and some of these discussions have centered on longer life spans, meaning that people need more resources and thus must maintain a lower withdrawal rate to keep from running out of money.
Peter Lynch, an uber-money manager of the 1990s, famously designated 7 percent as the ideal withdrawal rate (the 7 percent solution, he called it), but that was when the bull market was running wild with high returns, which, of course, didn’t last. Subsequently, many advisors have recommended a withdrawal rate of 3 to 5 percent, aiming more at 3 percent since the 2008–09 market meltdown. Flexibility in adjusting your withdrawal rate – to adjust for events like the meltdown – is as important as the rate itself.
Naturally, it doesn’t make sense to set a withdrawal rate without a good fix on how much money you’re withdrawing from. However, having a given withdrawal rate in mind helps you think about how much you’ll need.
Ideally, you don’t want to do this thinking too late. But even if you’re over 50 and have saved little, it’s not too late to make a difference. Waving the white flag of defeat isn’t an option, so do what you can.
Any opinions expressed here are those of the columnists and not of ABC News.
Jamie Cornehlsen Ted Schwartz are advisors with Capstone Investment Financial Group in Colorado Springs, Colo. Cornehlsen is also president of Dunn Warren Investment Advisors in Greenwood Village, Colo. A Certified Financial Planner®, Schwartz advises individuals and endowments. He holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at ted@capstoneinvest.com. Cornehlsen, a Chartered Financial Analyst®, advises business owners and employees on retirement plans. He holds a B.A. from the University of Colorado and an M.B.A. from the William E. Simon School of Business at the University of Rochester. He can be reached at jcornehlsen@capstoneinvest.com.
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