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Do you know how much money it would take for you to retire comfortably right now?
Once you can confidently answer this question, you’ll be able to understand your retirement timeline better.
Even if you aren’t quite ready yet, working through this poignant question can help you see if you are on the right track.
So how do you find the answer?
Here’s a process we recommend working through to find your ideal retirement savings “number.” Before you get started, download our master list of retirement goals. You may find it helpful as you think through the steps.
Make An Honest Calculation of Your Current Expenses
When was the last time you consulted your cash flow plan? Do you have a solid grasp of all your expenses? Have you taken the time to organize and tally them? Do you know your annual income?
If not, this is an excellent place to start.
You may be surprised by what you find as it’s easy to underestimate what you’re honestly spending each month/year/etc. Yes, the extra evenings out and longer vacations add up, potentially more than you realize in the moment.
Check each account you spend from, like checking accounts, credit card statements, or cash, and see what you’re truly spending each year. A solid rule of thumb is aiming to replace about 80-90% of your pre-retirement income for your golden years. Why so much? Your retirement expenses likely won’t dip as significantly as you think.
Add it up and get a number!
This exercise lets you see your current level of annual spending and shows you how much income you’ll need just to maintain your current lifestyle. For example, if you spend $5,000 per month, that's $60,000 per year. Multiply that by the number of years you think you’ll spend in retirement, 30, for example, and it really highlights how much you’ll need.
Keep in mind you’ll also have to factor the current and future inflation rate into those projections. $5,000 in today’s dollars likely won’t be worth the same 5 years from now.
Put Real Numbers To Your Big-Ticket Retirement Lifestyle Goals
Next, think about significant retirement spending goals that aren’t reflected in your current budget. If you are already spending on a particular category, think carefully about how that spending might change as you move into your new retirement lifestyle.
For example:
How much is your present travel budget? Will it increase in retirement? For example, if you live farther away from children and grandchildren, you might spend more on flights or gas to see them. Or you have a long vacation travel bucket list of adventures to book. Are you planning on making a move? Out of state? Downsizing? Snowbirding? Purchasing a vacation property?
What is your projected retirement age? Knowing when you retire will give clues into how much money you’ll need to do so comfortably. Retiring at 55 (early retirement) may look different than retiring at 62, or 67 (full retirement age for those born in 1960).
A little tip: Don’t fool yourself into underestimating the cost of your goals. If you do, you run the risk of undershooting your savings target.
Say you plan on moving out of state. Have you considered the cost of property in your new area? What about practical things like property taxes, homeowners insurance, state taxes, healthcare, etc.? Is the cost of living comparable, or will you spend far more on a night out, golf club membership, or a weekly trip to the grocery store?
By not being honest about how much your big-ticket retirement goals will cost, you may have to scale back your retirement vision, work a few years longer, or find additional stress regarding your money—that’s not the retirement you want or deserve.
Add it up and get a number!
Look Closely At Your Health
People are living longer than before. While you may think it makes sense to project your retirement plan to your 80th birthday, that notion might be outdated. At age 65, the average life expectancy is still 18 years for men and a little over 20 for women.
In addition to longer life expectancies, many retirees have a goal of living longer lives. A new Edward Jones Age Wave report found that although retirees are stressed about outliving their savings, nearly 70% of Americans want to live to 100. The people in the study cite 100 as the “ideal length” of time for retirement.
So whether you want to live longer, you’re more likely to live longer, or a combination, it’s critical that your finances can keep pace.
Consider how your present health and family history might affect your longevity, and come up with a reasonable estimate of your personal life expectancy. But use a healthy dose of caution.
You don’t want to run out of money because you underestimated your longevity.
Living longer is a good thing, but you need to account for additional medical expenses that come with a longer life.
An average 65-year-old couple can expect to spend $315,000 (after-tax) on health care in retirement, according to a Fidelity study. And that estimate doesn’t account for additional expenses that Medicare doesn’t cover, like long-term care costs, which may be more prevalent the older you get.
Think through some core health-related questions:
How “healthy” are you? What do you do to take care of your health as you age?
What’s your family health history? Do you have any underlying conditions to monitor?
What medications are you taking?
Do you require any specialist doctors?
Do you anticipate significant changes to your health in the next few years, like surgeries, hearing aids, etc.?
If you think you’ll live longer than average, how will that increase your healthcare expenses?
Add it up and get a number!
Weigh Your Debts and Assets
When you’re deciding whether or not you can sustain your retirement plans based on your current nest egg and spending habits, don’t forget about your personal balance sheet. Keeping this updated enables you to assess where you are regarding your outstanding assets or liabilities.
Do you have outstanding debts, like a mortage, personal loan, business loan, credit card debt, etc.? Will those be gone by the time you retire or are you on course to pay them off?
What about assets you plan to sell before retiring? These could be things like a business, real estate, or other big-ticket items. Larger assets could be a source of money to pay down debts or pad your nest egg.
Take some time to look at other retirement accounts, like a traditional IRA, Roth IRA, 401k, brokerage account, and more. You’ll also want to evaluate other sources of income, like savings accounts, real estate, annuities, pension, Social Security income, and more. Knowing the actual and projected value of these accounts helps give you a more accurate picture of your net worth heading into retirement.
Add it up and get a number!
Add Everything Up
Once you have a good overview of your cash flow plan and have made the necessary estimated adjustments discussed above, add them together to get a grand total.
Take your total annual expense estimate and multiply it by the amount of time you plan to be in retirement. You’ll get the generalized sum of money you need to pay for your planned retirement lifestyle.
Now you have a rough number!
Is Your Portfolio Up To Snuff, And How Can You Make It Last?
Now that you have a target retirement number, you can think through how to hit it.
Will you have enough to retire?
You need to map a plan for getting from where you are now to where you want to be. For example, maybe you think you’ll need to have $2 million saved by the time you are 60. But depending on your living expenses, retirement funds, and larger savings goals, that money might not last you as long as you thought.
Consider how your investments might grow over time. What is your expected rate of return, given how conservatively or aggressively you invest based on your risk tolerance, capacity, and other factors?
Don’t forget to include all of your other income sources as well, such as:
Social Security benefits
Pensions
Rental Income
Part-time work
Are you on track, given your portfolio assumptions and other income sources? If not, what can you do differently? Will you need to make any adjustments to your investment strategy?
If this seems like a lot to try and make sense of, we can help you make a realistic retirement plan that optimizes your portfolio and accounts for a wide range of unexpected turns. We use Monte Carlo simulations to help us chart the best path and track progress as we go.
If you’re ready to get started, contact us today, and we will guide you through the process of finding your retirement number and giving you the peace of mind to retire comfortably when the time comes.
Mark Fonville, CFP®
Mark is a fiduciary, fee-only financial advisor at Covenant Wealth Advisors serving clients across the United States. He specializes in helping individuals aged 50 plus create, implement, and protect a personalized financial plan for retirement.
Forbes nominated Mark as a Best-In-State Wealth Advisor* and he has been featured in the New York Times, Barron's, Forbes, and Kiplinger Magazine.
Disclosures:
Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.
The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account.
Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax, or legal advice. If you would like accounting, tax, or legal advice, you should consult with your own accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.