How Much Do You Need to Retire?

Retirement is a milestone most of us will reach, but not enough of us plan for. Only about a third of Americans believe they have enough money to live comfortably after they retire. In fact, most people underestimate how much they will need, as they forget to factor in healthcare costs.

To make sure you will have enough money to live on during your golden years, you will need to figure out how much money you will need. So, how much money do you need to retire? It is a great question, and it is one that is on everyone’s mind as they grow older. The answer, though, is not a simple one. You may have heard the “experts” recommend a million dollars, but the amount you need depends on what you have saved so far and how well you wish to live after retirement. In order to find your number, there are some questions you should ask yourself to determine your optimal amount.

What is your expected cost of living?

First, look at how much you spend now. This is an important part of retirement planning; you may want to create a budget to track your expenses. One rule of thumb says you will need 70 to 80 percent of your current income after you retire, but many wealth management planners say that will not be enough. Some of these planners say you will need 100 percent (or more) of your pre-retirement income every year for at least the first 10 years. More than likely, your spending will not decrease when you first retire, as you may want to travel.

Your expenses will likely change after you retire. Your health care and travel expenses will most likely increase, but other recurring expenditures may decrease. Your mortgage may be paid off, your taxes are likely to be lower, and you will not be paying payroll taxes.

Have you considered healthcare costs?

When budgeting for retirement, don’t forget healthcare costs. Tthis is one of the biggest mistakes people make when determining how much they will need for retirement. The Bureau of Labor Statistics estimates show that the majority of retirees will spend about $6,000 a year on healthcare costs; but seniors are also more likely to experience healthcare emergencies, so it is better to overestimate how much you will need, rather than underestimate those healthcare costs.

Many retirees are surprised to find that Medicare doesn’t help with high healthcare costs. You will actually have to pay Medicare premiums as well as coinsurance costs, which can be expensive. Some retirement planners suggest having a dedicated fund for healthcare costs after retirement.

How can you determine how much you will need?

It is difficult to predict the future, so it can be tough to predict how much money you will need to live on after you retire. Many financial experts say you will need 80% of the income you earned while working. This can overestimate or underestimate your spending, depending on what you do with your income now and what you plan to do during retirement. To err on the side of caution, some retirement planners suggest planning to live on 90% and 100% of preretirement income.

This is a simple calculation, and you can do it on your own, or work with a planner to determine your needs.

How much will you owe in taxes?

How will taxes affect you after retirement? Remember, you will be taxed on the withdrawals you take from your retirement accounts, including your 401K. Depending upon your income, you can be taxed on up to 85 percent of your Social Security benefits.

Income on investment account withdrawals and the taxable portion of your Social Security benefits will be taxed based on your standard tax rate. This is difficult to predict as tax rates change, but in order to plan, use your current tax rates to estimate future expenses.

Additionally, some states impose a state income tax on pensions and retirement account distributions. Some states also tax your Social Security. Look up your state’s tax rules or ask your financial planner to estimate what you will have to pay.

How long will your savings last?

Even though you may be saving now, do you know how long that nest egg will last? As people are living longer, it is important to look at your savings realistically. Today, it is likely one or both partners will live until the age of 95.

Are your savings generating enough money?

Most retirement planners recommend you put your savings somewhere they can generate $40,000 a year. This means you need about $1.18 million to support a 30-year retirement (retiring at 65 and living until 95). This is calculated by using average returns of 6 percent and inflation at 2.5 percent. Once you have a good idea of what you will need to retire on, you need to figure out where the money will come from, so you can determine how big your savings need to be to generate enough income. Investing can help. Talk to your retirement planner to ensure your money is working for you.


What can I do today?

Even if you haven’t yet saved enough for your retirement, all is not lost. Start saving now. Again, work with your retirement or financial planner to see what you can do right away. It may be as simple as putting more money into your 401K or adding more to your savings each month. If you start saving for retirement today, you will be on the right path. Over time, you can increase the amount you are saving, helping you reach the amount you need to be financially secure in retirement.

If you are ready to get serious about retirement, contact us at One Strategic Capital Inc today. We can help answer all of your questions.