Retirement savings … do you have enough?

What is YOUR retirement savings number? 

Everyone’s vision of retirement and their retirement savings need is different.  One household may desire a second home in a warmer climate. They will spend much of their time traveling and eating out.  Another may prefer to stay in their current home surrounded by family. Their goal is to help their kids buy their first home and/or leave a legacy to their kids and community.  Yet another wants to move to different country or start a hobby business. It’s not uncommon to see people “retire” but still have earned income. They love their work and found a way to work with the flexibility to live a retired lifestyle.

Obviously, each of these visions of retirement have a different price tag.

What will yours cost?

The Arbitrary 1 million (or 2 million… or 10 million)

Is one million dollars the magic number to retire (I’ve also heard two million and ten million).  While a million dollar savings does put you ahead of the average American it may not be enough to keep pace with your current lifestyle, especially if you are a high earner.  It’s important to consider what your definition of a comfortable lifestyle costs.  Just like everyone lives on different amounts before retirement the same is true in retirement.

10x Rule

The 10x rule says to take your salary at retirement age and multiply it by 10. This will produce the savings you need to retire comfortably.  While this method does consider your current spending capacity (assuming you are living within your means) it doesn’t take into account your actual retirement age and life expectancy.   This method will provide a very rough estimate at best and shouldn’t be relied on for retirement planning purposes.  A better use for the 10x rule is to have a number to start shooting for in your early accumulation years to keep you motivated toward a goal.

The 4% Rule

The most widely accepted calculation to roughly estimate your retirement savings need is the 4% Rule: retirees can safely withdraw 4% of their retirement funds in their first year of retirement and then that same amount each year after adjusted up for inflation. So if you’ve saved a million dollars, in your first year you would pull $40,000 of your retirement savings funds. If the inflation rate is at 2.5%, you would pull $41,000 in your second year of retirement. This amount would be in addition to social security income, any pension payment entitlements, etc.

It’s generally accepted that a retiree can live off 80% of what they earned in their last working year since they will no longer be paying Medicare and SS tax or making contributions into their retirement savings accounts.  Retirees may also find they spend less on transportation, clothing, and food. They also may spend more on travel and entertainment.

An Example

In this example, a couple has a combined SS payout of $450. One of them also has a $2200 monthly pension that was taken as a single life payout.  This couple currently spends $110,000 per year to maintain their lifestyle, pay taxes, and contribute to their retirement accounts.  We can take that $110,000 and multiply it by 80% to get an estimate of their annual spending needs in retirement ($88,000).  This couple has $54,000 in Social Security payments, $26,400 in pension payments leaving a $7,600 difference.  To utilize the 4% rule we can work backwards by multiplying that $7,600 by 25 to get the required savings that would fund this couples retirement.  That number is $190,000  ($190,000 x 4% = $7600).

Another couple with the same current spending, but without a guaranteed pension amount and only $4,000 in monthly social security payments would need to withdraw $40,000 annually which would require a $1,000,000 retirement savings fund according to the 4% rule.

The 4% Rule Doesn’t Take Everything into Consideration

It’s important to note, however, that the 4% rule doesn’t take into account if the spouse in the first example who has the single life pension payout dies long before expected leaving their loved one with $2,200 less income per month.  Nor does is consider that retirement dollars could be in a pre-tax retirement fund or a

Roth, which would make a big difference in how much of each withdrawal goes to fund retirement and how much goes to pay taxes.

Looking at the 4% rule, you can see what a shot in the dark pick

ing an absolute savings goal like $1 million can be without taking your own earning and spending levels into account, but also how each individual has to consider many other factors of their financial life to come up with a solid plan to cover cash flow needs through retirement no matter what happens.

Orgin of the 4% Rule

The 4% rule became a thing back in 1994 when Bill Bengen, a financial planner, ran analysis of market returns and spending scenarios over a historical, 75-year period and deduced that even during turbulent economic times starting with a 4% withdrawal and adjusting for inflation each year after for 30 years resulted in a very low chance of depleting your retirement savings.  His scenarios assumed investment into a diversified 50% stocks and 50% bonds portfolio.

The 4% rule has had its share of criticism over the years as some have expressed concerns of higher inflation, less confidence in the amount of social security income that will be available to retirees in the future, and the possibility that very poor returns in the first few years of retirement could lead to depleting funds prematurely.  Some, therefore, have adjust the 4% rule down to 3.5% or so.

Consider Hiring a Professional or Educating Yourself Further

Is a rough estimate good enough? A solid financial plan addresses every aspect of your financial life. Your spending needs, investment returns, taxes, estate planning concerns, and need for protection against all the “what-ifs” should all be included.  A highly qualified financial planner can help you find a retirement funding goal and distribution plan that maximizes your savings and minimizes your tax bill.  They’ll also give recommendations for protecting your assets, problem solving for the “what-ifs” and help you reach your legacy and charitable goals.  Are a true DIYer? I invite you to subscribe to my youtube channel, retirementplanning411 and join my Facebook group, Retirement Planning 411. There you can ask me anything about putting a plan together that takes you to and through your best retirement.

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