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“How Much Do You Need For Retirement?” - Dumb question?
By Meg | June 20, 2008
The internet, magazines, and books on personal finance are chock full of calculators and projections to help you figure out “your number” - the usually astronomical sum of money that it is allegedly going to take for you to live off your portfolio of securities, not work, and still maintain some semblance of the same lifestyle you had while you were working.
The exercise seems reasonable - necessary even - but the problem is that the results are almost entirely arbitrary, especially if you are more than 10 years away from retirement.
There are just too many variables:
- The rate of inflation
- The age you’ll retire
- The age you’ll die
- The rate of return of your assets (and at which point along the your personal time horizon the booms and busts occur)
- Your asset allocation
- How much social security you’ll get - and how/if/when the system will be restructured
- What healthcare will cost - and how/if/when the system will be restructured
- What your taxes will be - and how/if/when the system will be restructured
- Etc
Any shift in any one of these variables can drastically alter the final figure that pops up, telling you how much you need to have saved in order to retire at X age or how much each year you need to be putting away.
That doesn’t mean you shouldn’t strive to save as much as you can. After all, I’ve never heard anybody complain about having too much saved for retirement.
Still, it may mean that there’s no reason to be having panic attacks over the fact that some calculator says you need $3.5M in the bank before you can retire comfortably. You might be able to get by just fine on much less than that - or hey, you might even die before that “age 99″ you plugged in.
More from Meg at The World of Wealth
Topics: Retirement Planning |
June 21st, 2008 at 12:32 am
This is one of the hardest questions I’ve tried to answer for my own finances. At this time I don’t have a magic number but have setup my finances to save 15%-20% of my income for retirement.
June 21st, 2008 at 1:23 am
agree with your sentiment that many make it way more complicated than necessary - like jlp
for example. start with a million dollars will yield 50k invested in risk and worry free insured cd’s at 5%. if you can’t survive on only 50k a year, well, then, you need to have more. was that hard?
June 21st, 2008 at 3:19 am
I always laugh at the claims that you only need X percentage of your income during retirement. How does that financial magazine, advisor, etc. know what the person’s expenses are going to be?
The calculators can be somewhat better, but I had one calculator tell me that my age and salary were out of its range. I am in my 30’s and make more than average, but not outrageous amounts!
My biggest concern is healthcare expenses. But if I just keep saving as much as possible, I will hopefully not need to ever be concerned.
June 21st, 2008 at 6:57 am
given the number of variables, any calculation can be no better than an educated guess. Still, an educated guess is better than an unducated one.
The one thing that is absolutely wrong is the assumption that cost of living will be x% of pre retirement spending. Most people I know plan on spending more in retirement (mostly on travel) than before retirement.
June 21st, 2008 at 8:54 am
Even with all those variables, you need to have some idea of your best estimate of what you will need in retirement. That being said, by saving 15% of your income now, you will be far ahead of most people.
June 21st, 2008 at 11:22 am
Well put Meg. I completely agree. I’ve known this for a couple years now that there is just no way to figure that out yet because I am only 22 years of age. That being said, I’m also striving for financial independence, hopefully by age 50ish.
June 21st, 2008 at 12:19 pm
Honestly at my age, 35, I don’t even think about it. I just make sure I’m maxing out our Roths, getting the company match, and a total of 15% of household earning goes into a retirement vehicle, before I even see it in my paycheck.
But I advise my 64 year old parents on their investing and savings and it truly is a challenge. I just advise them to work as much as they want and don’t take out any loans for anything (cars and house are paid for). My mother’s parents died at 49&72. But my dad’s father died at 82 and his mother is still in good health at 90. Clearly dad could be looking at 30 more years of living expenses. Dad receives a state pension and great health insurance as a retiree. But he still works a contractural job that he could conceivably do for another 10 years. And mom does contract work (she has no state pension, but did work for the state long enough for health benefits). Basically both of them still work cause they want to, but having that money isn’t too bad either. I know we all dream of retiring and doing NOTHING, but when the time comes and your kids are grown and life has slowed considerably you still probably want something to do part-time.
But from watching both my parents and my in-laws its clear that money starts rolling in in your late 40s (kids finally graduate college and leave the house). I know that doesn’t work for everyone, but they have all 4 had very prosperous years in their 50s. That in addition to finally paying off their homes and not adding new debt (such as an expensive car) they all 4 can afford a pretty comfortable retirement, not rich, but comfortable. I’m not sure any of them ever put a “number” on their retirement. And I’m not sure a complete retirement is due for any of them - they all still enjoy what they do, just on a part-time basis.
I can only hope my retirement is so smooth, but since I’m already ahead of them as far as retirment savings I feel pretty comfortable I can expect the same.
June 21st, 2008 at 2:01 pm
I think you are being a little picky with this post. The whole reason for these columns and calculators is to get people to open their eyes to personal finance and retirement investing.
You listed 7 variables - hardly complex when you think about other forecasting measures. Everybody has a different lifestyle and how they view their future, however not everyone knows what will impact that future. Here are the variables, play with the numbers.
Retirement forecasting isn’t an exact science, it’s a directional indicator of what you need to do today to be independant in the future.
June 21st, 2008 at 2:35 pm
Meg–you are SO right.
I can’t resist using the calculators but the best they can do is give one a ballpark figure. And dang if that ballpark ain’t huge!
The biggest problem with most calculators is the inherent bias of the companies promulgating them–in order to sell their financial products, they must convince you of your great need for more and more money.
Contrary to Traineeinvestor’s comments above, most of the retired people I know find that their actual expenses are less than they were led to believe they would need.
June 21st, 2008 at 4:34 pm
While I may have waited to long to start being in my late (very late) 40’s I do have my house paid off, and I’m putting 9% into my 401k. My company matches 25% on the dollar for the first 6 percent so I’m not getting rich this way. I also buy stocks with direct stock purchase plans, so I have very low our no fees with this.
My biggest concern is health care! It would cost me over $1000 a month to have a personal plan verses the $300 a month I pay through my employer. Who can afford that?
At that rate I can not retire at 62 because Medicare does not kick in till 65, and with the cost of health care all it takes is one time to wipe out your life savings. Believe me I had my first and only heart attack at 38 and my out of pocket was over $20,000 with insurance!
Hopefully the direct stock plans that I’m investing in will yield enough dividends in my golden years so this will not be an issue.
June 21st, 2008 at 9:55 pm
I feel that healthcare will be the biggest problem as far as retirement. My goal would be to work part time to keep some type of benefits and some money rolling in, but if my house is paid off and the kids are gone (financially able to make it on their own). We could live off of my PT income.
I am hoping for this goal to be acheived by age 55 (home paid off, kids out much earlier).
June 22nd, 2008 at 12:05 pm
This is a poser. What we’ve done is to put 20% of our income in secure investments of all stripes. That should take care of us. Best to all of you.
June 22nd, 2008 at 9:57 pm
I still stand by my April comment on this question:
http://allfinancialmatters.com/2008/04/21/looking-at-retirement-income-needs/#comment-291944
June 22nd, 2008 at 10:07 pm
This is right on the money.
The difficult part is making the most of what you have saved once you hit retirement. I work in a financial services firm and we’re having a difficult time settling on one perfect retirement income solution for everyone (plan sponsors are begging for ‘one size fits all’ products) because of all of the variables you mention in your piece.
June 23rd, 2008 at 8:25 am
I think it’s just much more realistic to strive to save a percentage of income for retirement rather than strive to save a certain dollar amount. The older you are and the less you have set aside, the higher percentage of your income you’re going to need to put away.
There’s just no use agonizing about what “the number” is supposed to be if all you can put away no matter what is 15% of your income (or whatever) no matter what. When it comes down to it, all we can do is save what we can.
When you get older you just take a look at what you have and what (if any) other income you can count on. If you don’t have enough to live on, you’ll have to a) downgrade your lifestyle post-retirement or b) keep working. That simple.
June 23rd, 2008 at 10:20 pm
Without seeming to be flip, you’ll never know how much you’ll “need” in retirement, so it’s always best to save as much as you can from an early age.
Fifteen percent of your gross is a good start, every year, without fail. If you can stretch that to 20% or 25%, well, good for you, but that might be unrealistic. Be sure to set aside enough to receive any employer match you might have. It’s the best return you can get.
When investing that 401K, be sure to choose low-cost index funds (Vanguard or Fidelity) if that option is available in your 401K. Over a long period of time, fees can really reduce your gains.
Finally, as you approach retirement, don’t be shy about cashing out a bit and switching to high-yield laddered CDs. It’s not glamorous, but anything over 5% for half your portfolio at age 60 or so will help you sleep better.
Yours,
Bozo
June 24th, 2008 at 10:38 am
Would have to agree that this is one of the most perplexing questions, and also the one least able to predict. I’ve created some fairly complex spreadsheet models to play with (yeh I’m a fin’l gearhead at heart), and the one shocking I’ve discovered is how small variations in assumptions lead to huge differences in outcomes. I am I really only a percentage point in inflation away from either being totally destitute vs being flush with millions in retirement? And what accounts for all the happily retired people I know who do not have millions in the bank - Does dog food figure into their future diet? I don’t think that’s necessarily so.
As someone who likes to have a plan for everything, and who tends towards overkill in the PF dept, this is disconcerting to say the least. But, I’ve kinda learned to go with the flow. As long as I’m putting a substantial amount of my income towards saving and investment, then I’m figuring things will be just fine - though standard of living may need adjustment.
To add some complexity to it all, I actually do not so much want to fully retire, as much as simply have more personal life flexibility, as well as the ability to take on more career risk (i.e. transitioning to either having own business, writing/consulting for a living, or executive mgnt in non-profit sector, or all three). I want to continue being economically productive well into my 70’s if I can. I just want the OPTION to quit anytime I want and do whatever I want.
June 24th, 2008 at 1:21 pm
I’ve tweaked with some of those calculators and like Miguel found out small changes in saving, market returns, and future inflation can make it that I have saved comfortably or will run out of money. Let alone trying to figure out future tax laws, economic conditions, etc.
So, I keep going back to the fact that I will over time try to up the percentage of income I devote to retirement. That will hopefully do two things: one, have more money available for retirement, and two, learn how to live on less. I’m at 10% plus 5% matching and would love to get it to 15% long term.
June 27th, 2008 at 11:21 am
Knowing just how much you need to retire is a complicated matter. What makes things worse is the fact that much of the help people used to be able to rely on, Social Security and pensions, may not be all that helpful in the future. As a result, most of the pressure to save for retirement lies with your own personal savings. Workplace savings programs are a great way to help reach whatever goals you set, but half of Americans don’t have access to such plans. AARP supports automatic IRA programs at work, a plan backed by Congressman Neal of Massachussetts. You can see what the Congressman has to say about automatic IRAs on AARP’s blog ShAARP Session.
August 18th, 2008 at 12:27 pm
Only need five mil to retire no more.