How Much Do I Need To Retire?

One of the most common questions I get from clients, readers, and even people I meet when I tell them I’m a financial advisor is: “How much do I need to save for retirement?”

It’s understandable. There are a lot of numbers tossed around, from half a million to a million to even two million dollars. The question is: what’s the right number?

The truth is, there isn’t a universal number for everyone. It’s really specific to you. But don’t worry, in this post, I’ll walk you through five steps that you can use to get a better handle on what you need to save for your retirement.

Step 1: Figure Out How Much Retirement is Going to Cost You

This is where things can get a bit tricky, but it’s the most important step in determining how much you need to save. The first thing you need to do is take a hard look at your spending and put together some kind of retirement budget.

I’ve created a simple budget template that I offer to prospective clients, and I’ll share a link to it HERE. You can use this budget as a guide.

Here’s what to consider:

• Liabilities: If you still have a mortgage, car loans, student loans, or other outstanding debts, list them all. This will give you a good starting point.

• Fixed Expenses: These are the predictable monthly costs like property taxes, insurance, healthcare, utilities, and so on. If you're planning to retire early, don't forget to consider the potential changes in health insurance costs. If you're retiring before age 65, you might be paying more for individual insurance compared to what you paid when you were employed. On the other hand, some people may qualify for subsidies under the Affordable Care Act, which can lower their premiums.

• Variable Expenses: These are the expenses that can fluctuate and depend on how you want to spend your time in retirement. If you’re an active person with lots of hobbies or if you’re planning to travel or take on expensive activities, your expenses may be higher in retirement compared to what they were when you were working. This is where you really need to think about your lifestyle.

By estimating your monthly expenses in retirement, you'll get a clearer picture of how much money you'll need to cover these costs. Don’t forget, inflation can eat away at your purchasing power over time, so it’s important to plan for that.

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Step 2: Know What You’ll Be Getting From Social Security

Once you have a good idea of how much you’ll need to cover your expenses, the next step is to check what you can expect from Social Security. If you haven’t already, go to the Social Security Administration’s website (SSA.gov) and create an account to access your personal statement.

You’ll want to know how much you’re projected to receive from Social Security at your full retirement age (FRA). For example, if you’re planning to retire at 65 and your statement says you’ll get $2,000 per month, that gives you a solid starting point to figure out the rest of your retirement income needs.

If you plan to retire earlier than your FRA (say at 60 or 62), you’ll likely need to wait a few more years before Social Security benefits kick in. But even then, Social Security won’t necessarily cover all your expenses. This is why the next steps are so important.

Step 3: Do You Have a Pension?

Some of you may be lucky enough to have a pension. If that’s the case, great! You’ll want to get the details on how much that pension will pay out each month. You might receive a pension statement or have access to a tool online that helps you estimate how much you can expect to receive.

If you're not sure, reach out to the plan administrator to get a clear picture of your pension benefits. Knowing how much you'll receive will help you adjust your retirement plans and decide how much you’ll need to rely on your savings and investments.

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Step 4: Consider Other Income Sources

Beyond Social Security and pensions, are there other potential income streams in retirement?

Maybe you’re planning to work part-time during retirement, or perhaps you have rental properties that will continue to generate income.

If you have other income sources, be sure to factor them into your retirement planning. The more income sources you have, the less pressure there will be on your retirement savings.

Step 5: Evaluate Your Investments

Now, let’s talk about how to generate income from your savings and investments. This is where your portfolio comes into play. You’ll need to determine how much you can safely withdraw from your investments each year to cover the remaining gap between your expenses and other income sources (like Social Security or pensions).

One common strategy for retirement income is the 4% rule. This rule of thumb suggests that you can withdraw 4% of your portfolio each year and have a high probability that your savings will last throughout retirement.

So, if your annual expenses are $80,000, you’ll need a portfolio worth around $2 million to cover that (assuming the 4% rule applies).

However, you don’t have to stick to just the 4% rule. Some retirees use a more conservative approach and withdraw only 3% per year, while others feel comfortable with 5%.

The key is to find the right balance based on your risk tolerance and how much volatility you’re willing to accept in your investments.

For example, if you’ve saved up $500,000, withdrawing 4% would give you $20,000 per year. If you need more income, say $40,000, you’d need to adjust your savings target. If you have a higher percentage of stocks in your portfolio (say 70%), you might be able to withdraw more, but that comes with the risk of market volatility.

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Final Thoughts

Rather than focusing on an arbitrary number like $2 million or $3 million, you can use these five steps to figure out how much you need to save for retirement based on your specific situation.

If you want a more detailed analysis, there are tools and retirement planning software that can help. And of course, if you’re unsure or want personalized guidance, don’t hesitate to reach out to a financial advisor who can help you determine the best strategy for your unique goals.

The goal is to have confidence in your plan, whether you're preparing for retirement or already in it.

If you have a question or topic that you’d like to have considered for a future episode/blog post, you can request it by going to www.retirewithryan.com and clicking on ask a question. 

As always, have a great day, a better week, and I look forward to talking with you on the next blog post, podcast, YouTube video, or wherever we have the pleasure of connecting!

Written by Ryan Morrissey

Founder & CEO of Morrissey Wealth Management

Host of the Retire with Ryan Podcast