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Thayer Partners Blog

How to Determine How Much Money You Need to Retire

[fa icon="calendar"] Mar 16, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

How_to_Determine_How_Much_Money_You_Need_to_Retire.jpgWhen it comes to retirement planning, the biggest question you’ll face is how much money you’ll need. You don’t want to under-save and be forced to downgrade your preferred lifestyle, or worse, depend on your children for financial security.

To determine how much money you’ll need to retire, consider these estimation tips.

Know Your Budget, After Tax

If you don’t know what your approximate budget is, after taxes, you’ll have no idea how much you’ll need to retire. You can use Quicken or a related software program to track your spending. You can’t just pick a number out of thin air. You need to base the dollar amount on reality. Tracking your spending now can help you figure out how much you spend on a monthly and annual basis, so you can have a better idea of your budget during retirement.

Know Your Income Buckets

Most Americans will only have a few income buckets. Some will be able to depend heavily on an employer-sponsored pension, though this is becoming rarer as the years pass. You’ll need to know which pension benefits you are entitled to and when. Others will depend on Social Security to fund their retirement—but will it be enough? Using Social Security strategies when claiming your benefits can help you maximize the amount you will receive once you retire.

Knowing where your money will be coming from once you retire, and how much you can expect from each income stream can help you better understand how much you should be saving. You can follow the 4% rule of thumb for your retirement savings. Out of your total savings, you should only be taking out 4% every year, adjusted for inflation. So if you saved $700,000, you should only take out $28,000 per year to ensure that you don’t run out.

Do the Math

Once you’ve figured out all of your income buckets, add them up and take out the taxes. Then, subtract your after-tax budget. For example, if you will receive $42,000 from Social Security, plus $1,200,000 X 4% for a total of $48,000 from your 401K, your total income will be $90,000 less a ~22% tax rate. This will equate to $70,200 after-tax income. Now reduce that by $66,000 ($5,500/month household budget), and your nets savings for a rainy day will be $4,200.

Consider Your Desired Living Situation

Another consideration to keep in mind is where you plan to live. Are you planning to stay in your current house or are you planning a lower-cost destination in a warmer climate? Downsizing your house to pay off your mortgage can help you retire debt free and help you increase your cash flow. Moving to the lower-cost part of the US or even going to another part of the world will allow your dollar to go much further. For example, Costa Rica and Panama are classic examples of large US ex-pat communities. The area you choose to live in should have good healthcare standards where you can use your insurance. Research carefully.

Mind the Gap

Even after calculating an estimate of how much money you will need to retire, most people still discover a shortfall. There is a simple solution to cover this gap: work part time. If you’re not sure you’ll have enough money to retire and you want to play in safe, you can work part time doing something you love, or like, to raise your standard of living. The market is always looking for a mature, skilled, and experienced worker at a discount (i.e., part time).

Cost of Healthcare

To ensure that healthcare costs don’t drain your hard-earned retirement budget, know your health insurance options, especially when it comes to long term care insurance.

Knowing what Medicare does and doesn’t cover and understanding your supplementary insurance options can help you be better prepared for healthcare expenses during retirement.


Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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