Financial Planners See This All The Time: You’ve Saved Enough To Retire Comfortably Yet You’re Worried About Your Money Running Out And Want More Its Time To Ask Yourself How Much Is Enough Maybe Less Than You Think
Nearly six out of 10 Americans fear running out of money more than death, according to a survey by AIG Life & Retirement. Weve seen this play out with our own clients. Many have saved enough money to last 30-40 years, yet some still pinch pennies as if they are going bankrupt.
One particular couple comes to mind, a retired doctor and teacher. Their income from a pension and Social Security is nearly $100,000 annually about the same amount as their annual expenses. They dont touch their investment account of approximately $2 million yet they still worry they are spending more than they should. For example, just before the pandemic, they asked if they could afford to take a Mediterranean cruise that would cost around $10,000. Of course, they could.
If the past couple of years have taught us anything, its how precious life is. In the past year alone, weve lost clients to cancer, unexpected medical complications, heart attack and COVID-19. The pandemic gave all of us a wake-up call to ask what is really important in life. When it comes to money, the question is, how much is enough? While the answer is different for each of us, the facts show it may be less than you think.
Here are our recommendations to create peace of mind that you have enough:
Want To Boost Your Score Here’s How
Here are some ways to boost your retirement readiness whether youre behind on your goals or are on track but maybe want to retire a little earlier.
“My score needs attention.”
An individual retirement account is one of the most popular ways to save for retirement given its large tax advantages. You can put in up to $6,000 a year. And if you’re 50 or older, you can contribute an additional $1,000 a year. » Learn more about IRAs
“On my way, but I could close the gap.”
The annual limit for 401 contributions is $20,500 in 2022 . Its wise to at least contribute up to the point where youre getting all of the matching dollars your employer might offer. » See about increasing your 401 contributions
“I’m on track, but I want to do more.”
A good advisor can help you understand complex issues, diagnose potential problems and take steps to plan for the future. And theyre not as expensive as you might think. » Learn how to choose a financial advisor
How Much Savings Will You Need To Retire
Now let’s determine how much savings you’ll need to retire. After you’ve figured out how much income you’ll need to generate from your savings, the next step is to calculate how large your retirement nest egg needs to be for you to produce this much income in perpetuity.
So, if you have $1 million saved, you would take $40,000 out during your first year of retirement either in a lump sum or as a series of payments. In subsequent years of retirement, you would adjust this amount upward to keep up with cost-of-living increases.
The idea is that if you follow this rule, you shouldn’t have to worry about running out of money in retirement. Specifically, the 4% rule is designed to make sure your money has a high probability of lasting for a minimum of 30 years.
To calculate a retirement savings target based on the 4% rule, you use the following formula:
Retirement savings target = Annual income required x 25
Continuing our example, we saw in the previous section that our couple would need $4,000 per month from their savings. So, in this case, our couple should aim for $1.2 million in retirement savings accounts, such as a 401 plan or individual retirement account , to provide $48,000 per year in sustainable retirement income.
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How To Retire Early
If these examples dont work for your budgetor you can afford to save morethats okay. Remember, investing 15% of your household income for retirement is always a good place to start. Just be sure youre out of debt with 36 months of expenses in your emergency fund first.
Of course, thats not all you can do to get you to your goal. Heres how to boost your savings so you can retire early.
- Take advantage of tax-advantaged retirement plans as soon as you start your career. That gives compound growth more time to work its magic so you can put less effort into building a big nest egg.
- Pay off your mortgage early. Lets assume your mortgage takes up 25% of your budget. Knocking that sucker out slashes your household expenses by a quarter! Better yet, your home becomes a big asset you carry right into retirement.
- Visualize your retirement dreams. Retiring early means youll have a lot of free time on your hands. What are you going to do with that time? Whether you want to travel the world or spend your days volunteering in the community, having a clear picture of what your retirement is going to look like will light a fire under you to get there faster!
- Work with a pro. Everyones financial situation is different. The numbers weve crunched here might not work for you. An investment professional can help you determine how much you need to save based on when you plan to retire and the lifestyle you envision for yourself.
Before We Talk About Early Retirement
We know the thought of traveling the world or sipping margaritas on a tropical beach somewhere sooner rather than later is really exciting. But lets slow down just a little bit and make sure were on the same page about a few things!
Most importantly, you need to follow the Baby Stepsbefore you start daydreaming about an early retirement. In other words, any early retirement planning should happen on top of all the effort youre putting into the tried-and-true Baby Steps.
That means you shouldnt be doing any investing of any kind if youre trying to get out of debt or dont have enough money in your emergency fund. If thats where youre at, pause contributions to your retirement accounts and any saving you were doing for early retirement. No exceptions, people. Get out of debt, save 3-6 months of expenses for emergencies, then start investing.
Otherwise, you could end up with an empty 401, no college savings for your kids, and mortgage payments still hanging around as retirement draws near.
Heres why: If you dont have an emergency fund, you might be forced to tap into your retirement accounts foryou guessed itemergencies,like replacing your roof or losing your job. Then youll get hit with huge taxes and penalties. Or you might borrow money in those situationsthen youll be stuck in a cycle of debt instead of investing your cash. Thats no good!
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Is $25 Million In Super Enough To Retire On
A million dollars is often cited as the gold standard of retirement savings. It certainly sounds like a lot of money, but it may not provide the income you require if you are a couple or if one of you has high healthcare needs.
So weve decided to test run some higher retirement balances to help guide your planning, in this case $2.5 million. Using MoneySmarts Retirement Planner we have calculated how much income $2.5 million in super will generate under a range of scenarios including:
- Whether you are single or in a couple.
- The age you plan to retire. We have selected 60, which is a common goal, then 65, 66, 67, 68, 70 and 75 to show the impact of delaying retirement.
- How long you want your money to last. We run the numbers for age 85, 90, 95 and 100 on the basis that the average retiree will live until their mid-80s and some will celebrate 100.
- The return on your $2.5 million, net of fees. The return your super investments earn in retirement will depend on the type of investments you choose. A higher ratio of growth to defensive investments will result in a higher long-term return. To demonstrate the difference a few percentage points can make, we break down the annual income received for an average net return of 2%, 3%, 4%, 5%, 6%, 7% and 8%.
Spending From Your Assets
To close the gap between the income you need and the income you have, youll need to spend from your assets.
Live Off the Earnings?
Some people imagine retirement as a time when they live off the income from their savings. But for most people, including the clients I typically work with, thats not a reality. Especially if you plan to retire with $500k in assets, you will probably need to spend down your assets. Thats because interest rates are relatively low, and most retirees prefer to avoid taking major risks with their life savings.
To save enough to avoid spending from your principal, you might need to continue working longerwhich isnt always an option. The other option is to save so much of your income that its hard to enjoy yourself and make memories during your working years. Thats probably not very appealing, either.
A Safe Withdrawal Rate?
Its critical to make your money last. You dont want to run out of savings before you die, as youd need to make unwelcome sacrifices at a time in life when youre vulnerable. So, how much is safe to spend? One rule of thumb suggests that you can spend 4% of your savings per year. The success of that strategy depends on several factors , and the topic is constantly debated. Still, the 4% rule can be helpful as a starting point for learning where you stand.
To calculate your 4% amount for Year 1, multiply your retirement savings by 0.04 or use the tool below.
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Use The 4% Rule As A Guide In Retirement
The 4% rule is a well-known strategy. It suggests that retirees with a well-balanced portfolio can withdraw 4% of their initial retirement assets and increase this amount by inflation every year. It provides a steady income stream while also maintaining an account balance that keeps income flowing through retirement.
Heres a simple example: A couple with $1.5 million in retirement savings can withdraw $60,000 each year. This amount is added to their Social Security, pension and other income, providing plenty of money to life a comfortable life. Meanwhile, over the long term, the remaining amount can continue to grow from gains in stocks, bonds and other investments.
For those who think they should spend less, we encourage you to research this topic, because spending too little is also a lifestyle risk. We see some folks spending less than 2% of their assets per year in retirement, which we like to point out would probably take another Great Depression to result in them running out of money. Thus, determining the right withdrawal rate based on your circumstances can make for a very comfortable retirement.
Can I Retire Early Three Early Retirement Options
These days, retirement can look different for everyone. For some, their long-awaited life of leisure kicks in right after they walk out of the office for the last time. Others see retirement as a chance to abandon the corporate treadmill for a purpose-driven pursuit.
Lets take a look at three different ways early retirement could work for you.
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What Does Life Look Like In Retirement With $2 Million In The Bank
Heres a little maths experiment. In order to know how far $2 million can take you, you will need to break down the whole sum into your approximate life span. We love going by average numbers, so here it goes:
Assuming you retire at the age of 60 and make it to 85 thats 25 years to cover financially. With $2 million in the pocket, it comes to about $80,000 per year or $6,667 per month to spend. And were just talking about savings alone!
Granted, with that much in the bank, we are quite certain that you are over the asset limit to be eligible to receive an age pension for a while. However, it should also be enough to cover your expenses and provide you with an income as if you were still working potentially even more.
With $2 million in the bank, you could afford a very comfortable lifestyle with lots of travelling and little luxuries every month. Picking up a new hobby or having a pet at home should also be an easy financial choice. Donating to charity or volunteering is also an affordable option. But again, it all depends on how you plan to get through retirement on a daily basis.
They Have $12 Million And No Pensions Can They Retire Summary
Karla and Toby have significant assets to spend in retirement, but they would need to analyze how much they will spend on a year-over-year basis to confirm if $1.2 million saved is enough. But here is the punchline for everyone:
For any couple in their mid-50s that just intends to spend $40k-$50k per year on average from their portfolio, we can see from above this $1.2 million nest egg is enough to retire on almost regardless of the stock market returns they might face.
For a couple like Karla and Toby that might aspire to spend about $70,000 per year from this amount, they will face some retirement risk depending on actual investment returns.
To make any retirement plan a great plan, including yours, I suggest you really get into the details about what you intend to spend per year, be adaptable with that spending plan if faced with below average investment returns, and try to reduce your investment costs as much as possible. If you do those three things plus build-in some contingency money for emergencies, I think youll be well on your way to retirement success.
I hope to come back to Marks again for more case studies!
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Schedule Your Retirement Consultation
If youre ready to retire at 60 or want to find out more about retiring, you can schedule your retirement planning consultation today.
We will use this meeting to discuss your plans for retirement and how we can help you to achieve them.
If you decide that were right for you, we charge a fixed flat for our retirement planning service.
You can see an example retirement plan here.
James Mackay, Independent Financial Adviser in Bristol
How Much Money Do You Need To Retire
A common guideline is that you should aim to replace 70% of your annual pre-retirement income. This is what the calculator uses as a default. You can replace your pre-retirement income using a combination of savings, investments, Social Security and any other income sources . The Social Security Administration website has a number of calculators to help you estimate your benefits.
It’s important to consider how your expenses will change in retirement. Some, like health care and travel, are likely to increase. But many recurring expenditures could go down: You no longer need to dedicate a portion of your income to saving for retirement. You may have paid off your mortgage and other loans. And your taxes are likely to be lower payroll taxes, which are taken out of each paycheck, will be eliminated completely.
Be sure to adjust based on your retirement plans. If you know you wont have a mortgage, for instance, maybe you plan to replace only 60%. If you want to travel every year, you might aim to replace 100% or even 110% of pre-retirement income.
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Schwab’s Suggested Allocations And Withdrawal Rate
- Planning time horizon
- Planning time horizon
- 3.4% to 4.1%
- 4.9% to 5.4%
- 9.6% to 9.9%
Schwab Center for Financial Research. Initial withdrawal rates are based on scenario analysis using CSIA’s 2022 10-year long-term return estimates. They are updated annually, based on interest rates and other factors, and withdrawal rates are updated accordingly.1 Moderately aggressive removed as it is generally not recommended for a 30-year time period. The example is provided for illustrative purposes.
How Long Do You Want To Plan For
Obviously you don’t know exactly how long you’ll live, and it’s not a question that many people want to ponder too deeply. But to get a general idea, you should carefully consider your health and life expectancy, using data from the Social Security Administration and your family history. Also consider your tolerance for managing the risk of outliving your assets, access to other resources if you draw down your portfolio , and other factors. This online calculator can help you determine your planning horizon.
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How Much To Save For Retirement
According to Fidelity, you should be saving at least 15% of your pre-tax salary for retirement. Fidelity isnt alone in this belief: Most financial advisors also recommend a similar pace for retirement savings, and this figure is backed by studies from the Center for Retirement Research at Boston College.
For many people, however, saving for retirement isnt as simple as setting aside 15% of their salary.
The 15% rule of thumb takes a couple factors for grantednamely, that you begin saving pretty early in life. To retire comfortably by following the 15% rule, youd need to get started at age 25 if you wanted to retire by 62, or at age 35 if you wanted to retire by 65.
It also assumes that you need an annual income in retirement equivalent to 55% to 80% of your pre-retirement income to live comfortably. Depending on your spending habits and medical expenses, more or less may be necessary. But 55% to 80% is a good estimate for many people.
Finally, the 15% rule wont provide you with a nest egg that supplies all of your retirement income. Youll most likely derive part of your retirement income from Social Security, for example. All in all, the 15% estimate should provide you with steady retirement income that lasts into your early 90s, at a rate of around 45% of your pre-retirement income.