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Thayer Partners Blog

Retirement Planning: How Much Money Do You Need to Retire Comfortably?

[fa icon="calendar"] Apr 15, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

Retirement_Planning-_How_Much_Money_Do_You_Need_to_Retire_Comfortably.jpgRetirement planning has become more stressful in recent years. With the cost of living constantly increasing, life expectancy higher than ever, and company-sponsored retirement pensions facing extinction, you might be worried about how much money you’re going to need to save in order to retire comfortably. In fact, this is the biggest question for most Americans who are planning for retirement. But, unfortunately, there is no easy answer. The true cost of a comfortable retirement is almost entirely based on your unique circumstances.

Use the strategies below to get the best estimate.

The 4% Rule

If you follow the 4% rule, then you should be able to withdraw 4% from your retirement portfolio in the first year, and then withdraw the same percentage of the account value every year in retirement without running out of money in retirement. By using this approach, you’ll be able to understand if you’ve saved up enough money to live comfortably and cover your desired lifestyle in retirement. To get $40,000 a year in income pre-tax, then your portfolio will need to be worth about $1 million dollars—but keep inflation in mind. Though the 4% rule isn’t a fool-proof method, it’s not a bad starting point.

After-Tax Budget

You might be thinking, “But how can I figure out how much money I‘ll need to live on in a year?” Well, you need to figure out your budget, after tax. This will be the most important thing you do during the retirement planning process, and the analysis needs to be accurate. You can’t know how much you’ll need to save if you don’t have a good understanding of your spending habits.

Use a spreadsheet or a software program and start tracking your expenses. Include your housing, clothing, food, heat, water, medical expenses, and recreational expenses—after tax. This will give you a good idea of how much you spend every month and every year. If you’re spending about $4,000 a month on your necessities and leisure, for example, then you’ll require approximately $48,000 after-tax per year in retirement. You will then need to convert this after-tax figure to pre-tax.

Consider All Income Buckets

Your savings likely won’t account for all of your retirement income, however. You’ll receive Social Security, you might have a pension, you might have assets you plan to sell, like your business, cars, or a home, and you might have some investment income to count on. Add up all of these income buckets to see how much they’ll cover of your yearly retirement expenses and how much you’ll have to cover with savings. Tip: know what Social Security strategy will work best for you in order to maximize your benefits—this can make a huge difference in your retirement income.

Other Considerations

Retirement planning isn’t cut and dry. There are other factors to consider, besides your income and expenses, to determine how much money you’ll need to retire comfortably.

  • Are you going to stay in your current home or downsize. Or are you planning to live in a lower-cost area of the country? This can significantly reduce your housing expense.
  • When do you think you’ll retire? The age at which you stop working can have a big impact—the later you retire, the less you’ll need and the higher your Social Security benefits will be.
  • Will you be taking debts into retirement, or will you be able to pay them down in order to increase your cash flow?
  • Will you be living modestly, or do you plan to travel the globe and live it up? You’ll need to save more for bucket-list items.
  • Will you retire fully or still work part time? Working part time during retirement can reduce boredom and allow you to raise your standard of living, making it possible to retire sooner than otherwise possible.

Did you consider health-care costs in your equation? Healthcare costs from sudden illness, disease, or accidents can drain your savings. Make sure you’re protected by purchasing long-term-care insurance.

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Topics: Retirement Planning

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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