How Much is Enough?

November 16, 2005

When it comes to living in retirement, how much money is enough to retire on?

I’ve posed this question in the past. However, since reading (actually, I’m still reading it) The Number, I find myself asking the question again. How much do my wife and I need in order to have an enjoyable retirement? Most people shoot for the standard $1,000,000 and think that once they reach that goal they are set. The problem with that is that $1,000,000 today is worth a heck of a lot more than $1,000,000 twenty or thirty years from now will be worth.

For instance, let’s say your goal is to retire with $1,000,000 in the bank. You are now 40 and plan to retire at age 60. At a 3.5% inflation rate, your million dollars will only buy $500,000 worth of stuff when you retire. If you take a safe withdrawal of 4%, you will withdraw $40,000 your first year. However, that $40,000 will only buy you what $20,000 buys today. I don’t know about you, but that doesn’t seem like a fun retirement to me.

So, what’s a person to do? Short answer: SAVE MORE! The long answer to come later.

3 responses to How Much is Enough?

  1. That’s true, from my calculations, you would need a lot more to save than 1 million dollars if you have many
    years before retirement. You need to calculate the future cost of money you need for retirement. I think I
    will need about 3 million before I can retire comfortably. People need to be careful about setting their safe
    withdrawl rate too high or else they will run out of money.

  2. The problem with the “you need a gazillion dollars to retire” argument is that many people see it, figure it’s impossible, and buy a new SUV instead of working on their savings. (This is particularly bad in those articles in the financial press that say “you need X% – where X is large – of your current income to retire”, instead of more conservative amounts which are more managable – and take into account the fact that a good saver is actually setting aside a decent percentage of their current income, which presumably isn’t needed in retirement.)

    While I’m a huge fan of caution and conservatism, I can also see how OVERestimating retirement expenses can verge on being irresponsible, particularly if it dispirits people and causes them to ignore retirement planning altogether because they’re completely daunted.

  3. @Foobarista – I disagree. The numbers are the numbers. Money doesn't care about emotions. As discussed above the fantasy million dollar goal is what I refer to as "The Millionaire Myth." It is rarely enough to retire. You can get all fancy with Monte Carlo retirement calculators to figure your number but it is unnecessary. Nearly every approach agrees you can spend roughly 4% (there is solid math behind why this true that is too complex for a comment but is explained in How Much Is Enough To Retire Since you can spend 4% the "Rule of 25" suffices as a simple approximation where you multiply first year spending in retirement by 25 to figure your savings goal. Of course, as stated above, that must be adjusted for inflation. Finally, make sure to not get caught in focusing exclusively on savings, but rather build your assets for spendable cash flow. This is necessary to deal with the growing life expectancy problem not discussed in this post.

    Hope that helps.