Journey to retirement is long, winding, and full of highs and lows. But what remains constant is the need, and hopefully the desire, to stay on the long path to retirement. But the million dollar question is, how do you know which path to take if you don't know what the destination is? In this post, we examine this exact question. How much money do we need when we finally want to retire? This number helps us to determine the path we need to take and when we might get there.
What's the Goal?
Before you can determine how much money you need to retire, you must first answer the question, "what's my goal for retirement?". Below are some question that will probably help answer this question:
- Do you have an age in mind at which you want to retire?
- Do you fully understand your employer's retirement benefits?
- How much money do you have in your 401K for TSP accounts?
- Do you want to continue working until retirement?
- If you have a partner, does he or she want to retire at the same time and what are their employer benefits and entitlements for retirement
- Will you have healthcare in retirement, or will you be reliant on Medicare?
Above are some questions you should answer about your particular situation and if you feel overwhelmed by them, that just means you haven't thought about these before and that you need to give it some thought. Trust me, you will feel better once you complete this exercise and chart a path forward. You can't afford to put off answering these questions any longer.
How do you calculate your retirement number?
It's complicated, and there are many schools of thought on this topic. Some recommend that you should save anywhere from 15%-25% of your annual salary starting in your 20s to accumulate a comfortable nest egg for retirement. The goal here is to invest enough money to withdraw 4% every year without running out of money for the duration of your retirement. What I have seen more recently and what I think is a more practical way to determine how much should you have at age 65 is: let's say at age 30, your salary is $100,000, every 5 years after age 30, save as per blow chart.
My family's retirement number is $2.2 million. I know what you might think; this is a huge number and how did you come up with this number? Well. I had help. I worked with a fiduciary financial advisor to calculate our savings so far, future savings rate, and employer retirement benefits, and potential market returns to come up with the $2.2 million that will last the during of our retirement given the 4% withdrawal rate. So, why the 4% withdrawal rate? well, it's simple, it's assumed that the market return for your investments will generate 8% or more each year and if you only take out 4% in retirement, you should never run out of money.
Pro Tip: Splurge on a financial advisor. They can help you come up with a plan and give you a path to follow for retirement. Just be careful when picking an advisor, make sure they are with a reputable company and that the advisor and the firm are fiduciary. If they try to sell you exotic financial products, they probably are commission based and may not have your best interest at heart. You can check FINRA's website to check their background and their qualifications.
Some caveats: the savings $ amount I discuss above are principle savings, meaning it does not consider market returns for your principle. In order to get a more realistic total savings at retirement, assume 6-8% return each year. Also, if you plan to retire with your significant other, you must conduct the same exercise with them. They should also have saved up the same multiple amounts in order to provide for your family in retirement.