How Much Do We Need for Retirement?

How Much Do We Need for Retirement?As we’ve been working on improving our finances this year, we’ve been looking at our retirement savings. Even though we’re still in our twenties (barely) and retirement is decades away, we still planning ahead. Part of our motivation has been having some older friends stay at jobs they don’t like because they don’t have enough money to retire.

We’re hoping to develop a big picture plan that will allow us to save for retirement without leaving us financially deprived now. Figuring out how much you need is easier said than done. There are plenty of tips, suggestions, and ideas on the web to get you started.

Since we’ve been running our numbers, I wanted to share some of the thoughts that have gone into it.

Define Your Retirement Goals

One of the things that makes retirement planning difficult is determining exactly what you want out of retirement. There are some important questions that you need to answer before you can determine how much you’ll need to stash for retirement.

  • When do you plan on retiring?
  • What kind of lifestyle do you want to maintain while retired?
  • How long will your retirement money need to last?
  • How much (if anything) can you count on from Social Security?

When you do you want to retire?

Retirement means different things to different people. Some people don’t want to stop work; they may just want to cut back on hours and work (for example) as a part-time consultant. Others may be looking at a more traditional retirement, and need to make sure they have a big enough nest egg to live off of for several decades (or more).

Or maybe you want to take a series of “mini-retirements” during the next few decades before take the big one. My husband and I are thinking about moving more toward freelance and location-independent work. While we want to significantly cut back on hours, we probably wouldn’t want to completely stop working as long as we’re able to do something we love.

How much annual income will you need during retirement?

To determine future income needs, you should start by analyzing your current annual expenses. Look at what expenses you may not have during retirement as well as what new expenses you may take on. For example, some people will have paid off their mortgage, or may be planning on downsizing to a smaller home. For many, health insurance will become a much bigger expense later in life.

You can use a spreadsheet to figure out your required nest egg. Just be sure to factor in the effects of inflation when running your numbers. We’ve been using an average rate of 3.75%.

When we thought about it, we’re looking at needing around $45, 000/year (in current dollars) for our retirement years. By paying down our mortgage, we’re hoping to help lower retirement expenses and give us some peace of mind.

How long do you need your retirement income to last?

I found determining our life expectancy a bit weird. We can’t predict how long we will live, but we can plan based on average life expectancy. According to the US Census Bureau, if you’re a 30 year old female, you have a life expectancy of 76 years (72 years if you’re male). Based on that, we’re estimating around 80 years for both of us, which is a bit longer than the current averages.

After using the spreadsheets to give us a ballpark figure, we’d need around $1.3M if we were retiring right now. That looks like a pretty steep number, so we’re hoping that the power of compound interest will help us out.

Do you include Social Security with your retirement planning?

Many members of Generation X or Y are wondering if Social Security will be around when they retire. While it seems likely that something will be around, the program as it stands doesn’t have enough money to sustain itself. Thus, there will almost certainly be changes. Given the uncertainty, we’ve decided not to count on it.

If there are some benefits when we retire, then we’ll have some extra income to work with and I’m sure we’ll put it to good use. I just don’t want to our plan to require Social Security to be successful — it’s better to be safe than sorry!

Executing the plan

Once you know how much you need to retire, you have to figure out how to fund it. Start by checking your monthly cash flow, and figuring out how much you can afford to set aside for the future.

Depending on how much you have to invest, here are some ideas beyond high yield savings accounts and certificates of deposits on where to put your retirement savings.

I’ve found that automating our investments and savings is the most painless way to keep you on track. If we can pay off the student loans, then we’ll have more money to direct towards the retirement fund.

What about you?

I’d love to hear from you about how you’re preparing for retirement. How soon are you hoping to retire? And how much money will you need?

13 Responses to “How Much Do We Need for Retirement?”

  1. Anonymous

    re: Glen A couple of points:
    Those who retire young need to figure out how they are going to handle medical insurance.
    Inflation (as Lorne points out) is important. If you say you can get $45,000 off of your investments and that’s enough you could face a rude awakening in 20 years.
    Finally, believe it or not, many people spend more in retirement. What do you do on the weekend? Well retirement is a full time weekend. People find they travel more, eat out more and generally take up expensive hobbies when they retire.

  2. Anonymous

    The biggest problem I meet with is that people ignore inflation at all. Your pension seems ok today, but when you adjust it, the image completely changes. $30K in 1990 was $17K in 2009 – that’s quite change. Not to say that I am not sure if we can count on the traditional 1-2% inflation we witnessed for last decades after the recent monetary madness. Unfortunately, people will have to save more than they think to get less than they think…

  3. Anonymous

    $45K per year seems high to me for 2 people in current dollars. Keep in mind that your costs will typically go down in retirement. For instance, you may have 2 cars now because both you and your spouse work. In retirement though, it wouldn’t make sense to have 2 vehicles.

    I have to agree with Todd on not using the traditional model of I need X millions of dollars to retire. I prefer the income approach. I have an estimate of yearly expenses in retirement, and I know I can retire when my investments reach that level of income.

    Also I think retiring at age 65 is ridiculous. If you go by the averages then you only have 7-11 years left. Even if you live to 80 that’s only 15 years. Also keep in mind that you will have less energy at that point in your life, so that may limit what you can do.

  4. Anonymous

    I retired when I was 53 and was laid off. I figured I had enough money so I just didn’t look for another job. That was 25 years ago, and I have never missed working. (Being child-free made it a lot easier.)

    Most of my retirement money is in a joint and survivor annuity, with my wife, in TIAA-CREF’s traditional plan. I ave been using their “graded benefit option.” Since a straight annuity would have given me more money than I would have needed at that time, I opted to have a small amount of money taken out of my benefit and reinvested in more annuities. That way I get a 5% increase in my payment every year.

  5. Anonymous

    Some good thoughts on retirement… hats off to you for starting young. Given your age you may want to shift your thinking away from the traditional asset based model (estimating 1.3 mill) and focus on a cash flow based model. Inflation will be very difficult to estimate going forward and may wreak havoc with traditional modeling where assets lose purchasing power. There are so many variables you must assume in traditional modeling that slight inaccuracies over such a long time period can double and triple the amount of assets required. However, cash flow based models don’t require all these assumptions and have the added advantage of shifting your focus to alternative assets such as building your blog business or income producing real estate instead of a traditional portfolio of stocks and bonds. In short, beware of conventional assumptions and models. There are other approaches that may be more effective.

  6. Anonymous

    Well, I have been increasingly skeptical of the integrity of the “financial industry”, i.e., those who are brokerage houses, market makers, mutual fund and annuity companies and the stock market. The pervasiveness of greed (Madoff, Goldman Sachs, and Lehman come to mind) make me question whether I want to participate in an industry that is so rife with immoral, selfish and simply base motives. That being the case, we are considering other options. My husband and I already own our own business and we purchased an income property last year (which is currently cash flow positive). We hope to buy another property this year. We are in our early 40s. We’ve been investing in the stock market and in mutual funds since our late 20s with mixed results. I often wonder, though, about the people who worked at Enron–many invested everything in their 401K just to see it go up in smoke. So, we’re going the diversified route. We still have some money in stocks and bonds but we’re thinking of more tangible things such as another business and/or property. And, might I add, we live in California (LA area) where it is ridiculously expensive to live. And, what does retirement really mean, anyway? We both agreed that we want to contribute to the communities around us throughout our lives, hopefully to the end!

  7. Anonymous

    I do exactly as the execution plan states in this post. Except I have not maxed out my excess 401(k) contributions, I am close, but not there. With that being said, I do live a frugal live in my late 20’s. I know other people younger and older than that don’t even have a roth IRA. With that being said I feel I am ahead of the curve and have decided to take two years off from working and travel and do the things I want to do in a few years. This will allow me to:

    1. Help me define what I want to do in retirement, another words, see if I get bored doing my hobbies all day.
    2. Do all the things and go the places I ever wanted to go because there is no guarantee that I will live to 65 or beyond. I feel like I am wasting away the best years of my life sitting behind a desk

    We are all frugal in some way to save for retirement yet we have no idea if we will even like retirement. We simply do so because it fits the status quo.

  8. Anonymous

    Thanks for sharing your retirement plans and ideas. I’m sure we’re refine our plans as we need to. I just wanted a starting number to focus on.

    Corey, is there any way you can lower your monthly expenses? I hope that you have some breathing room for short term savings like an emergency fund.

  9. Anonymous

    Looks good on paper, but sadly my monthly expenses are so high I have had to drop my 401k contribution to 1%. Better than nothing I suppose, at least until I find a 3rd job.

  10. Anonymous

    Love you site! The whole insurance part of early retirement is the tricky part. I would love to retire before 50 (9 more years) and should be in a financial spot to be able to other than figuring out the insurance part.

    Dollars Not Debt

  11. Anonymous

    A few points:
    First, retiring at 65 is not so horrible. Few people who have ever lived on this planet have had the “luxury” to look forward to doing what they want for 20+ years in good health!
    Second,
    Medical insurance is tricky if you retire before 65.
    Third,
    In your 20s or 30s it’s easy as long as you are frugal and two people are working…just save all you can in tax advantaged accounts. Taking full advantage of the company match is really smart.

  12. Anonymous

    “retirement” for us is more about financial freedom than about quitting our jobs – well, it is for me (if it’s about not having a job, my hubby is already there!). I am one of those people who can never sit still. I see myself still doing some sort of work until the day I die, whether it’s paid or volunteer work. The difference is – IF I am working past my 55th birthday, it will be because I WANT to, not becuase I HAVE to (and any money I earn then will not be needed – so we can give it all away). You know what’s sad? When you’re at work celebrating a coworker’s 55th bday and the subject turns to retirement – and everyone in the room talks about how there’s no way in the world they will be able to retire before they are 65 (and this was a room full of CPAs! You’d think they’d know better!). I just hung out in the corner with my mouth shut during that whole conversation. We’ve been planning since our early 20s, and unlike every one of my coworkers, and most Americans (http://moremoney.blogs.money.cnn.com/2010/05/02/reality-sinks-in-for-401k-investors-%E2%80%94-and-providers/), we are well on track to retire at 55.

    Our “retirement plans” include:

    -paying off ALL debt before we retire. Right now, all we have left is the mortgage and that will be paid off before I am 41 (could be paid off much sooner if the husband had a job, but we’re both much happier with him staying home with the kids – even though the last is starting Kindergarten in the fall, he will still be at home to take care of all the cooking, cleaning, and homework when they get home). We have also vowed to NEVER borrow again. We are (have been) saving so that any future purchases (cars included) can be bought with cash.

    -Not counting on SSI. I’m in my 30s now – I assume it won’t be around when I retire. If it is, well that’s just icing on the cake.

    -Both of us have many relatives who have lived well into their 90s. Given family history, we are planning to have enough to last us until we are 100. If we stick with our current strategy and our retirement accounts earn an average of 6.5% until we retire, then 3% WHILE we are retired, we will have enough to last until I am 107 (yes, I’ve done up a lovely forecast using excel!) 😉

    -we also have a very modest style of living – not a lot of wants. I don’t expect we’ll need more than $45K per year (in today’s dollars) either – but we are planning for more *just in case* 😉

    -For saving the right amount – You hit the nail square on its head! Take advantage of your employer’s full match, then max out IRAs, then back to 401K or whatever deferred comp program the employer offers. I’m also making sure that our retirement accounts are the right mix of traditional vs ROTH so as to maximize the tax benefits over our life (what maximizes our future value of investements, not just what gets us more money THIS year – gotta plan long term).

    -I rebalance all retirement accounts and review the strategy every year. At the beginning of each year, I also set up each account for auto investment for the year. Don’t try to time the market – just take advantage of Dollar Cost Averaging.

    -Trusting in God (the most important!), but still taking the steps to be good stewards of what he’s entrusted us with.

    Retirement planning is not easy – so many things to consider. And it’s hard to balance today’s needs/wants with future needs/wants. You don’t want to short change yourself on either end. And, when you arrive at your number, it can be daunting – most people think, “I’ll never be able to save that much!” But with the right planning and discipline, it CAN be done. If someone like me – who came from a family with NOTHING and paid her own way through college – can reach millionaire status before turning 55, anyone can do it! Compounding interest is a magical thing! 😉 And it WILL pay off 🙂

    Congrats to you for having a plan and starting early!

  13. Anonymous

    Good thoughts on retirement. I would reconsider the $45K income. It may sound like plenty now, but your lifestyle will change as you get older and will get more expensive.

    IMHO getting out of, and staying out of, debt is the key. Getting ahead of the curve is important. Don’t carry a balance on credit cards, pay yourself a car payment each month so you can pay cash for cars and try to pay off your home before you retire. I added some extra to each mortgage payment and accelerated paying off our mortgage while still saving and investing.

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