How much will you need to retire? What’s the magic number you’ll need to save to consider retiring?
This is a big question for half of my clients who are still working. This number can be motivating, or for most Americans who are way behind, it can be depressing.
So how does one figure out what their magic number is? You could always google it.
If you do that you’ll come to this figure – $1.46 Million.
Northwestern Mutual interviewed 4500 people in January this year and that was the average dollar amount people thought they needed to save to retire.
After thinking about it, honestly, it’s not a terrible number.
As a Financial Planner, I’m supposed to say “rules of thumb” are garbage for financial planning and you should have a specific, custom, personalized, tailored, complicated, EXPENSIVE… financial plan done with an expert like myself.
We’re happy to do that for people, but most don’t need a hundred-page financial plan. They just need something simple to shoot at. After all simplicity is the ultimate sophistication (Da Vinci) and everything should be as simple as possible, but not simpler (Einstein).
So, if you’re near retirement and just looking for a number, you’re good to go. Go figure out how to save $1.46 Million by the time you’re in your mid-sixties.
For the rest of you who want a bit more detail, let’s look at some rules of thumb to figure out your magic number.
(Below is not my child. I tried to get my almost 2-year-old, Charlie, to give a thumbs up for a picture, but I guess he’s not a thumbs up kind of guy yet.)
Current Income
What is your desired income in retirement?
Rule of thumb #1 – Use your current income.
No need to think long and hard about your budget in retirement, just use your current income. You’ve lived on it this long, it will probably be more than enough when you retire. Typically you need less income when you retire since you wouldn’t be saving or spending as much on gas or work expenses, but to make life easy, just use your current income.
Retirement Income Sources (social security, rental income, pensions…)
How much will you get from Social Security?
Rule of thumb #2 – Use the average SS payout of $20,000/yr.
If you don’t know, or don’t want to login to SSA.gov to find out your specific payout, then use the average payout. If you’re married, double it. That will get you started on what you’ll have coming in.
Add in any pensions (this is important for my Kaiser Permanente clients), rental income, part-time work, or other retirement income you’ll have to get your a total retirement income.
Investment Income
How much income will you need to generate from your savings/investments?
Rule of thumb #3 – Subtract retirement income from current income.
Current Income – Retirement Income = Needed Investment Income
Example: If you currently live on $100,000 in income and you’ll have $20,000 from social security each year then you’ll need to generate $80,000 in investment income to cover your needs.
Multiply by 20
How much savings will you need to get your investment income?
Rule of thumb #4 – Mulitply your investment income by 20 to get your magic number.
Example from above: $80,000 x 20 = $1,600,000
Pretty close to the number you would have gotten if you googled it!
The Bottom Line
The bottom line is there is no magic to THE number. We have retired clients with much less than the magic number who are living a fantastic life in retirement. We also have clients with many times this magic number who are worried about how much they have.
The number is always changing, it’s always elusive, and it seems to always be more than you will have. The best thing I have seen people do in 19 years is to pick a realistic number and figure out how much you need to work and save to get there. Then, when you get to retirement age, and the magic number is assuredly different than what you thought it was going to be, figure out how to live on the income it generates.
The average American has $88,000 saved for retirement. It seems counterintuitive to stress about whether your number is $1.46 or $1.56 Million.
Use some rules of thumb to figure out how much you’ll need, or call us and let us do the work for you.
Our specialty is helping simplify the financial/retirement plan down to one page, FOR FREE! Click below to see an example of our Can-I-Retire Spreadsheet. It’s how we keep score of retirement for clients and help them answer the question, “Can I retire?”
Let us know if we can create one of these for you.
Thanks for reading,
Tim Porter, CFP®