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How Much Money Does One Need to Retire Comfortably?

Couple calculates how much they'll need to retire comfortably

4 Tips to Help Guide Your Retirement Savings Strategy

One of the most common questions we receive from new clients is, “How much money should I save for retirement?” If only there was one simple, straightforward answer. However, like so many financial questions, the answer depends on a number of factors. The following tips can help you determine how much you may need to live your desired lifestyle in retirement.

#1 – Start with a plan.

One of the best ways to determine how much money you’ll need to retire comfortably is by working with a qualified wealth advisor to establish a comprehensive financial plan. This process should take into account your current financial situation, your goals for the future and any challenges that could stand in your way.

Your financial plan should provide insight into your expected retirement expenses, your estate planning goals, your tax liabilities, your investment return potential, your retirement income sources, inflation and more. Taken together, this information can help you determine how much you may need to save to achieve your desired retirement lifestyle.

#2 – Use a retirement planning calculator.

During the planning process, consider using a retirement calculator to help analyze how much you need to save. This calculator allows you to visualize how adjustments to different inputs could impact your long-term retirement spending potential.

#3 – Don’t forget your monthly income sources.

Another strategy is to determine the amount of monthly retirement income you’ll need to fund your desired lifestyle after factoring in the fixed and variable income sources available to you. From there, review if you have enough saved to cover your remaining monthly income needs.

For example, let’s assume you need $10,000 each month to live your desired retirement lifestyle. This amount could include expenses related to housing, food, healthcare, transportation, utilities, travel, hobbies, taxes, etc. You expect to receive $2,000 a month in Social Security benefits, $2,500 a month in rental property income and $500 a month in interest income from your investments, which brings you to $5,000 a month in income. This means you’ll need to withdraw another $5,000 per month from your retirement savings (rather than the full $10,000).

This approach may allow you to feel more confident in your retirement savings, knowing other sources of income are available to help fund your retirement lifestyle.

 #4 – Consider (but don’t rely on) common rules of thumb.

There are many well-known “rules of thumb” to help you determine how much you may need to save for retirement. Two of the best known are the 80% rule and the 4% rule.

The 80% rule

This rule states you should strive to replace 80% of your pre-retirement income each year in retirement. The rule assumes certain expenses will decrease after you retire, such as taxes, commuting to work and contributions to your retirement plan.

While it’s true that some retirees can lower their monthly expenses in retirement, others actually spend more. If your retirement goals include extensive travel or a second home, you may find that your expenses go up in retirement, not down. Plus, you never know when an unexpected expense may arise, such as large medical bill outside your budget.

The 80% rule is a good one to consider as a starting point, but you should also take into consideration your personal spending needs as you determine how much you’ll need to save for retirement.

The 4% rule

According to the 4% rule, you should plan to withdraw 4% of your retirement savings in your first year of retirement as either a lump sum or a series of payments. In subsequent years, you would slightly increase your withdrawal amount to keep up with inflation. The idea here is that you shouldn’t have to worry about running out of money in retirement so long as you continue to invest in a diversified portfolio that earns a moderate rate of return.

While the logic is there, there are a few of problems with this approach:

  • It fails to address market volatility. During a market correction, you may want to avoid taking a full 4% withdrawal if it’s not needed in order to allow your investments a chance to recover.
  • It locks you into an annual withdrawal amount, which may not make sense for your lifestyle. Also, you never know when an unexpected expense may arise that could require you withdraw more than 4% and derail your strategy.
  • Considering life expectancy is crucial. This study was carried out in the 1990s, when the expected duration of retirement was shorter compared to what current retirees experience.

Just like the 80% rule, the 4% rule can be a helpful guideline — but you must always consider your desired retirement lifestyle before relying too heavily on either. 

The bottom line? Determining how much you need to save to retire comfortably is a complex decision that depends heavily on your personal objectives. The best way to get a handle on your retirement savings is by working with a qualified wealth advisor to develop a custom, comprehensive financial plan that addresses your specific needs.

Need some help getting started? Creative Planning is here for you. We serve as a partner in helping clients plan for retirement. Our goal is to provide you with the confidence of knowing you’re on track to achieve your retirement goals. To do so, we integrate the various aspects of your financial life into a comprehensive financial plan specifically designed to help you retire. To learn more, schedule a call with a member of our team.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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