How much do you need to retire? In a nut shell, probably more than you think. According to the 2012 Retirement Confidence Survey from the Employee Benefit Research Institute, only 14% of Americans are “very confident” that they’ll have enough cash to live comfortably in retirement. And no wonder: 60% of workers have less than $25,000 saved for old age (not counting home equity).1Hard to believe, but true!
Having advised hundreds of clients about their retirement goals I can offer a few thoughts on the subject. First and foremost, you must come up with your estimated retirement budget. One rule of thumb long sited is that most of us will need 70% to 80% of our pre-retirement earnings to finance a comfortable retirement. This may be a reasonable assumption to make, however, I see many clients spend 100%, or more, of their pre-retirement income in retirement. This trend seems most common with those who are newly retired and increase their budget for travel, home improvements and health care. Very seldom do I see a client start living on 30% less the day they retire. I can say however, that over time most retirees do eventually spend less as they age, slow down their lifestyle and reduce costly expenditures on things like travel, shopping and entertaining.
Once you determine your budget you can make a few simple calculations to determine how much is needed to support your goals. After years of debate, the general consensus among financial advisors is that retirees should plan on a portfolio withdrawal rate of 4% to 5%. This is the percentage of your total savings that is withdrawn in the first year of retirement. The amount is also assumed to be increased each year for inflation. The 4% to 5% guideline for withdrawals has been statistically proven to have a high probability of making your money last over a 25 to 30 year period. Withdrawals above 5% tend to dramatically lower the probability your money will last your entire lifetime, so controlling your spending and hence your rate of withdrawal is critical! One million dollars in savings may sound like a fortune to many. To make it last, however, you can reasonably expect to have that $1,000,000 support a draw of $40,000 to $50,000 per year plus inflation for a 25 to 30 year retirement period. Factor in your other sources of retirement income (Social Security, pension income, part-time work, etc.) and it is fairly easy to apply the math to your retirement income goal. Being a millionaire is not what it used to be.
The key to all of this is to plan. Putting the numbers on paper can be a very sobering experience for many. The upside is that most people who take the time to estimate how much money they will actually need for retirement end up changing their savings plans and putting away more. Sadly, most of the retirement advice put forth by experts is largely ignored. Better start planning and saving now. A comfortable retirement takes a lot more than most think.
1. Time.com Business & Money, How Much Should You Save for Retirement, 12-5-12
Damien helps individuals invest and manage risk. He is a Certified Financial Planner™ professional and a principal of Walnut Creek Wealth Management. These are the views of Damien Couture, CFP® and not intended as investment advice. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or Damien@WalnutCreekWealth.com.
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