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Thayer Partners Blog

Wondering How Much You Actually Need to Retire?

[fa icon="calendar"] Feb 29, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

Wondering_How_Much_You_Actually_Need_to_Retire.jpgThe first thing you’re going to have to figure out once you start retirement income planning is how much money you actually need to retire. You don’t want to save for years and then retire only to realize that you planned incorrectly and don’t have enough saved to retire comfortably. You don’t want to realize that you’ll run out of money in 10 or 20 years. Knowing how much money you’ll need is a critical question that you’ll need to answer. But there is no one-size-fits-all approach or easy answer.

To get a good estimate, use these tips.

Know Your After-Tax Budget

Track your spending! Know how much you realistically spend each month, after tax, to figure out your budget. You’ll have no idea how much you’ll need for retirement if you don’t fully understand your expenses. There are many software programs that can help you track spending or even a simple spreadsheet will do.

Add Up All of Your Income Buckets and Subtract Taxes and Your Budget

Hopefully, you’ll have a few income buckets to count on during retirement. You may have a pension from your company, Social Security benefits, IRAs, 401Ks, or a savings account. Add up all of these income buckets. Then, take out taxes and subtract your budget from step one to calculate your net savings. Example: SS is $42,000 plus 401K is $1,200,000 X 4%=$48,000. Total income is: $90,000 less ~22% tax rate is $70,200 after tax income less $66,000 ($5,500/month household budget), with nets savings for a rainy day of $4,200.

Use the 4% Rule

The 4% rule was first coined in 1994 by financial planner Bill Benger. Essentially, it means that you need enough saved to be able to meet your annual expenses by withdrawing only 4% of your retirement nest egg each year. For example, if you need $40,000 to cover expenses in your first year, you’ll need to have saved $1 million dollars in total because $1 million x 4% = $40,000. The 4% rule is a sound retirement strategy to consider following, though it is not foolproof.

Decide Where You’ll Live

Not every location is created equal. If you live in a pricy area of the country, you might want to consider moving to a lower cost area in the United States or a warmer destination in a different country. Doing so will allow your dollar to go a lot further. Whether you move or not, though, it would be wise to downsize your house and pay off any mortgage and other debts, so you can retire debt-free in order to increase your cash flow.

Mind the Gap

Even after the most strategic retirement income planning, you might still discover a shortfall in your savings. There’s a simple solution to cover this gap in income: work part time. Working part time after you retire has a myriad benefits. First, you can stave off boredom, remain physically active and mentally challenged. Second, you can pursue some bucket-list items, like travelling abroad. And third, you can raise your standard of living to ensure that you can live comfortably once you retire. 

Consider Your Healthcare Needs

If you have a pension with medical benefits, know what you’re covered for. Know what Medicare covers as well. If you see any gaps in your coverage, make sure you’re protected in case of illness, injury, or disease. You don’t want a health crisis to drain your savings. You don’t, for example, want all of your retirement income to go to a long-term care facility. And you probably don’t want to have to depend on your children financially because your healthcare bills are astronomical. Although you can’t possibly know for certain what type of healthcare needs you’ll have during your retirement years, you can still anticipate the worst to ensure that you’re protected. Consider buying supplemental insurance, especially long-term-care insurance, to protect your retirement savings. Self-insuring long-term care is usually a bad idea.


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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