By Boyce F. Lowery, CLU, ChFC
Trying to figure out how much you need to retire comfortably is one of the hardest parts of retirement planning (besides actually saving the money). Unfortunately, there isn’t a cut-and-dried answer. It all depends on your estimated expenses, your life expectancy, your potential income streams, and how they’re taxed.
That said, answering these five questions will help you start figuring out how much money you need to retire.
What Will Your Expenses Look Like?
To answer this question, start by creating an estimated budget for retirement. Anticipate how much you’ll pay for things like:
- Rent or mortgage
- Other fixed expenses (phone bill, internet, TV, insurance, auto loans, groceries, etc.)
- Discretionary expenses (trips, hobbies, dining out, entertainment, etc.)
- Irregular expenses (property taxes, holiday gifts, tax bills, etc.)
- Medical expenses (doctor visits, prescriptions, etc.)
- Long-term care expenses (insurance premiums and/or out-of-pocket costs)
Don’t forget to account for inflation too. For example, if you anticipate living off of $5,000 a month in retirement but won’t retire for another 10 years, you’ll actually need around $6,095 a month, assuming a 2% annual inflation rate. (1)
What Will Your Income Streams Look Like?
Now it’s time to think about where your income will come from in retirement. Most people will have multiple sources of money. These may include fixed-income streams, such as:
- Social Security
- Rental income
- Part-time work
As well as variable income, such as:
- Earnings on savings
- Dividends and earnings on investments
Write down all your anticipated earnings. You can estimate your Social Security benefits using the SSA’s Benefits Estimator.
How Long Will Your Retirement Last?
No one knows exactly how long their retirement will last, but there are three factors you can use to make an educated guess.
- The age you plan on retiring. The average retirement age in the U.S. is 64, (2) but you may want to retire earlier or later depending on your lifestyle goals.
- The average life expectancy in the U.S. The average male lives to age 75.1 and the average female lives to age 80.5. (3) If you’re a healthy 65-year-old today, there’s a 35% chance you’ll live until age 90 if you’re male and a 46% chance if you’re female. (4)
- Your family health history. Take a look at your personal health history as well as your family’s. Are you at a higher risk for developing certain chronic diseases or illnesses? How long do people typically live in your family?
Using these three factors, you can get a rough idea of how long your retirement may last. For example, if you’re in good health, come from a long line of women who typically live until at least age 90, and you plan on retiring at age 60, then you know to plan for a retirement of at least 30 years.
What’s Your Safe Withdrawal Rate?
Do you know how much money you can safely withdraw from your savings and investments to avoid running out of money? There’s a popular rule of thumb that says 4% is a safe withdrawal rate. (5) So, if you have $1 million saved for retirement, you could safely live off of $40,000 a year, adjusted for inflation, and your money would last around 30 years.
This rule isn’t set in stone—and some experts argue it’s not as reliable as it once was. You can use it as a general guideline when estimating how much money you need, but you’ll want to adjust it depending on stock market performance, your anticipated life expectancy, and your goals.
How Will Your Income Be Taxed?
This last one is something you’ll never escape: taxes. You’ll need to be just as diligent about planning for taxes in retirement as you are now because almost every income stream you’ll have in retirement will get taxed a different way.
For example, any withdrawals you make from your Roth IRA will be tax-free, but withdrawals from your traditional 401(k) will get taxed as ordinary income unless you are using the Roth option. Likewise, withdrawals from your investments will get taxed based on capital gains rates, which can vary depending on how long you’ve held an investment and your taxable income amount.
And if that wasn’t confusing enough, all of your taxable income for the year will determine whether or not you pay taxes on your Social Security benefits. It can be a lot to manage—which is why it’s critical to work with a financial professional who can help you plan for a tax-free (or tax-minimized) cash flow in retirement.
How We Help
Figuring out how much money you need to retire comfortably requires you to do a deep dive into your current financial situation and your goals. These questions are good conversation starters and can be used to get you thinking about how much money you need to save. But if you’d like professional help pinpointing exactly what your target number should be, we at Suncrest Advisors would love to help. Call us at 888-827-0146 to get started.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.