How much do you need for retirement? What is your number? If you are getting ready to retire or are still working, you need to be thinking about how much you will need once you get to your desired retirement age. While there is no clear-cut answer to this question and it will be different for each and every one of us there are some general guidelines we can follow. First you need to determine your risk tolerance for the markets and how your investment strategy will be formed. As you move from your 20’s to 30’s then 30’s to 40’s and so on your strategy will be ever changing. When you are younger, you can take on additional risks someone closer to retirement age may not be able to take on in their portfolios.
When you are nearing retirement one method to see if you have saved enough is to figure out how much you will need in annual income then multiply that times 25. So if you need $150,000 you need to back out any Social Security benefits you will receive, say $30,000. Then let’s say you will also receive a $40,000 pension also to Social Security. That means you will receive $70,000 from sources other than your savings leaving only $80,000 that you will need to make up for in income. That means you need $80,000 times 25 or $2 million in savings to be safe.
Now that you have an idea of how much you need to save the next question on all of our minds is how much I can afford to take out of my savings on an annual basis. There are several different ways to approach this, and one is the four percent rule. And that is you can withdrawal four percent a year and adjust that for inflation with a good chance you will have enough money to last you to the end of your 30-year retirement. In our example from earlier the four percent would be the $80,000 you would need on an annual basis. As inflation has average about three percent over the last several decades that are a good figure to use when calculating you need the second year or $82,400. This method should allow you to live comfortably and not run out of money as you age.
Another popular approach is the market approach, and that is when you base your withdrawals from your account based on the markets and your risk tolerance. Based on your risk tolerance and the markets you can expect to withdrawal between 3.9 percent and 5.7 percent a year. These are averages and are by no means set in stone as the four percent rule.
A third method is the custom approach, and that will rely on you as the retiree. This is a more involved process than the four percent rule but may be simpler than the market approach but in reality is more of a combination of the two. It takes your particular needs into account and will change as your needs evolve over time.
As each of these methods is unique, it is the same for your retirement planning. Everyone is unique in their needs just by the nature of the situation. I do like the custom approach as it allows for differences from year to year and allows for changes in your lifestyle and needs change. Retirement will likely last you almost as long as your working career but unlike during your working career you will not be adding income to your retirement as you will be retired. To be safe, it is always the best practice to seek the advice and counsel of a professional financial planner.
If you need any additional information or further information feel free to contact me.
