If you ask ten different people how much money is enough to retire, you can expect ten different answers. That’s not necessarily a bad thing, as the idea of what makes a comfortable or good retirement varies based on personal goals and preferences.
The truth is, there’s no magic number that will serve as a one-size-fits-all when planning for the future. We all have individual factors to consider in determining if we have enough to retire.
But the fact that there’s not a single “right” answer shouldn’t deter you from trying to come up with the best answer for your situation.
So how can you determine what that magic number will look like for you? Use these 3 steps to get clarity — and confidence about where you stand in relation to your ultimate goal.
1. Start By Knowing What You Have Today
In life, you often need to create your own definition of success. Using someone else’s metrics can leave you feeling unhappy and dissatisfied.
But when it comes to financial planning, there’s a little more objectivity: you either have enough to sustain your needs once you reach retirement (or financial freedom), or you don’t.
In this case, you can define what financial success look like in terms of your net worth. You need to start here to understand where you are today. After all, it’s hard to develop a plan to get to your goal if you’re not sure where you’re starting from.
Your net worth is all of your assets, minus all of your liabilities. Your assets are all your investments, bank accounts, and cash — and could include your property (although some people leave out the value of their home from net worth calculations if they plan to live in it during retirement).
Your liabilities are your debts or anything that you owe: credit card balances, what’s left on your mortgage, and other loans, and so on.
You can use a net worth calculator to help you, or you can talk to a financial planner who can review your finances and help you put together a comprehensive plan for your future.
The process can get overwhelming (especially if your net worth wasn’t what you were expecting) and often brings up a lot of questions about whether or not where you are today is good enough to get you to the financial future you want.
A professional can help ensure you’re on the right track and map out specific steps to take to catch up if you’re a little behind.
2. Envision Where You Want To Go Tomorrow
Now that you know your net worth, or what your wealth looks like today, we need to understand the other side of the coin: where you want that net worth to take you.
You can only know how much money is enough to retire by laying out what you actually want that retirement to look like. In other words, how much will your retirement cost to? What does that look like on an annual basis?
It’s hard to know exactly what your expenses will be (especially if retirement is still a decade or so away for you), but you can start estimating. You can create a mock retirement budget to get a better idea of what your expenses will look like.
Start with the easy stuff: your set costs like living expenses and necessary bills. These might include:
- Housing and utilities (Where do you want to live? Will you downsize or move to a vacation hotspot? Do you want to travel a lot? What does that mean for your permanent residence?)
- Transportation (Can you downsize how many cars your household maintains once you retire? Will you move to a place that’s more walkable or accessible by public transportation — or will you move farther away from the city and expect transportation costs to rise?)
- Insurance premiums (What’s your plan for health insurance? Will you drop term life because you no longer have financial dependents? Do you need other types of protection instead?)
- Healthcare (Based on the benefits you can receive, what do your healthcare costs look like? Do you have an HSA you can tap into?)
Thinking about what your retirement will look like day-to-day, along with what bills you expect to continue to pay and which ones you’ll no longer need to take care of can help you build out the foundation of your budget.
From there, you can consider what you really want (and not just what you have to pay for). Think through your answers to questions like:
- Will you travel or do you want to spend lots of time in your community?
- Do you want to provide financial support to family members?
- What kind of activities or hobbies do you want to pursue?
- Will your lifestyle change, and if so, how?
It might not be a bad idea to pad your budget a little bit with a few extra hundred dollars per month for unexpected expenses or costs you forgot to include. Then, you can multiply that budget by 12 to estimate how much your retirement will cost you each year.
Then run that number across the amount of years you expect to be in retirement. If you retire at 65 and reasonably expect to live to 90, for example, then you should multiply your annual budget over 25 years.
3. Compare Your Existing Savings with What You Need for Retirement
If you came up with a retirement budget of $50,000 worth of annual spending, then you’d need $1,250,000 in your investment portfolio in order to safely retire today without running out of money.
Run your own budget numbers, and then compare to the wealth you have to determine if you have enough. If you need help, this calculator can help you determine how long your retirement savings are likely to last or if you might outlive your current savings.
(And again, this is where a financial planner can come in and give you confidence. Trying to figure out this on your own requires a lot of guesswork, but an expert can give you objective advice on whether or not you have enough to retire.)
If you feel like you don’t have enough to retire, don’t panic! For one, you might still be years out from a realistic retirement age, so you have time. Make the most of the last decade of your career and optimize your savings and investment strategy to grow your wealth.
And two, remember that you have options. You may be able to:
- Reduce your retirement expenses, so you need less in savings to live on
- Create other income streams, so you don’t rely 100% on your savings
- Work part-time or slowly phase out of your existing career so you extend the amount of time you earn a paycheck, which, again, reduces the burden you put on your nest egg
You can also develop a smarter investment strategy now that allows you to make the most of your opportunities to put your money to work for you.
Still Not Sure? Use These Rules of Thumb
Feeling completely lost? Try using one of these rules of thumb to help estimate how much you need to have in the bank before you kick back from your career.
The first is called the “multiply by 25” rule. This guideline helps estimate the total amount of money you need to have saved by the time you retire in order to match your budget (which is the last step of the process we walked through above).
Under this rule, you would multiply your annual budget by 25, giving you a target retirement amount. You should multiply your budget by however long you expect your retirement to last.
Or you could use the 4 percent rule. Instead of telling you how much you need to save, this calculation shows you how much of your existing nest egg you could safely withdraw and live on in a year.
Most financial advisors consider 4 percent a safe amount to use that allows you to cover expenses, while also reducing the risk that you’ll run out of money in retirement. Of course, everyone’s situation is different and you may need a more conservative estimation.
Remember, all the calculations and rules of thumb suggested here are simple ways to arrive at estimates. They are not hard-and-fast answers that you should interpret as written in stone.
If you want a more concrete answer, a financial planner can conduct an in-depth calculation to provide you with targeted savings goals and expected future returns.
Working with a professional allows you build a retirement road map that is based on knowledge and experience, creating a path from where you are now to where you want to be in the future.
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