How Much Money Do You Need to Retire?

No matter where you are in your retirement planning process, it's important to take some time to really consider how much money you'll actually need when you retire. Obviously, no one is able to have a perfect plan because of the many unknowns in the future, but there are four questions you can answer in order to fine-tune your retirement savings goals.

Many articles will tell you that you need to set aside enough to replace 70-80% of your yearly income to cover every year of retirement. I feel like that’s a good beginning, but it’s also a little confusing when you try to apply it practically. Some get confused, is that gross income or net income? Do you decide this based on your highest earning years or your medium earning years? Will your cost of living actually be lower due to external forces? What are those factors?

Resting your retirement plan on a basic, average “rule of thumb” doesn’t really give you the best information.

Instead, I’d invite you to consider four questions that should really help you find some tangible answers and see if you’re on track with your current savings plan:

1. Where do you plan to live in retirement?

2. What types of leisure activities will make your life full, and how much will they cost?

3. How long will you need this income to last?

4. What's your projected budget?

Where should You Live in Retirement?

This first question may seem simple, but it’s actually something that a lot of people don’t consider as they’re making up their plan for retirement.

You need to have an idea of where you want to live. If you’ll be splitting time between two states, what will that look like financially?

There’s a helpful article you can review called HowMuch.Net where you'll find a map of the US and a breakdown of the average retirement age in each state and the average amount of retirement income you’d need to retire in that state.

Obviously, these are all just estimates.

I’d recommend using this tool to get an idea of the difference between states. Due to cost of living, you need about 100% more assets to retire in New York or California and 50% more to live in Florida than you would need to retire in Ohio. There's no surprise there because of the higher cost of living in those states, but it's also a good reminder of the standard of living here in Ohio too!

So, where do you want to live during your retirement?

How does the cost of living there compare to other locations? Look it over and consider the differences. Don’t create a retirement income plan for Ohio if you’re planning to move to Florida. Make your plan so that it includes the cost of living anywhere you hope to call home while you’re retired.

What types of leisure activities will bring fulfillment to your active retirement years?

In retirement, you'll have time to do things you've had to put aside because of work. These activities bring joy and meaning to life and they’re worth budgeting for… just make sure you study up on what all is involved in the activities you’d like to pursue and add this to your plan.

Figure out the details and add them to your plan. Golf isn't just green fees.

If you plan to sit on your front porch in a rocker it will cost less than if you're planning to

  • Play golf

  • Visit family

  • Tour Yellowstone

  • Cruise the Caribbean

  • Snow ski out west

There's a pretty big difference in expenses there and everyone's lifestyle is different. That's why we add these things to the plan early.

How long do you need your income to last?

This question is very specific to each individual. Obviously, you’ll only be able to guess on this one, but it’s still important to consider.

You can research the average life expectancy for the nation. Last I researched this it was age 85 for males and 88 for females. You can also look at what the average life expectancy is for each state. Another factor you absolutely must consider is your own family history and your own lifestyle. How are you taking care of yourself? Do you have people in your family who’ve made it to age 100? That makes your likelihood of living longer than average much higher.

Consider your family history, your health history, as well as the national and state averages.

Then, once you feel confident you have a solid estimate, set the age you land on about 5 years longer. You have to have a little bit of safety there and life expectancy has actually still been going up in our country, regardless of the pandemic.

I know this isn’t the most exciting math problem you’ve ever done, but you need to have a goal in mind when you plan so that you can find a path that makes sure you don’t run out of money, that's the real key here.

Finally, once you’ve sat down and gone through each of the previous questions and come up with an estimate:

What is your projected budget?

Okay, I don't really like to call it a "budget." We tend to call it a "lifestyle" or "cash flow" worksheet.

If you need help with this, reach out to us, we're here for you. Answering this question can seem daunting. Give us a call or shoot us an email and we can send you our Merit Lifestyle Worksheet (yes, it's a budget worksheet, but that name is much kinder- don't you think?). This will help you figure out a monthly and yearly amount that you'll plan to spend in retirement.

Essentially, you just break down projected expenses like your mortgage, medical insurance (many people forget they'll still have premiums and medical expenses in retirement), utilities, etc. We focus on those need-based things first.

But, again, I think it's important to also have some fun planned into that "needs" category.

I'm certainly not suggesting you use up all your income on leisure activities, but you don't want to forget to put them in your budget because you’re going to have a lot of free time- time you've never had before. You earned it. Our greatest and most valuable resource is our time. The goal here is to plan intelligently and efficiently so that, finally, we can control our time.

How you want to use that time will need to be reflected in your budget.

Your budget is only going to be a projection but, based on my experience with clients, really nailing down what you expect to spend in retirement can get you laser focused on your savings goals.

If you revisit this budget once a year, you’ll be in a great place to look over your current savings and always judge, "am I on track to retire with a high or low probability of success?" That's something we always help our clients understand. By answering these four questions, you'll be well on your way to understanding that for yourself as well.

If you're 5, 10, 15 years from retirement, wouldn't you want to know if you only have a 30% probability of living the retirement of your dreams? We help clients understand where they are and what steps need to be taken to reach their goals. If you'd like some help walking through these questions, give us a call today.

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