The Truth about Retirement
By Greer Gibson Bacon, CFP®®
It takes serious money to maintain a secure, comfortable lifestyle in retirement. Yet, most people under-estimate how much they’ll need to save especially successful professionals who often confuse high earnings with wealth (net worth). As you examine your retirement plan, here are a few key considerations.
How much income do you need? A good indicator of what you’ll need later is what you need today. Although you may spend somewhat more or less in retirement, a 55-year old couple enjoying a $350,000 lifestyle today is not likely to enjoy a $175,000 lifestyle in retirement. Defining your magic number requires brutal honesty.
Once you’ve defined how much income you’ll need, subtract estimated Social Security benefits to arrive at how much you’ll need from retirement savings. For example, if our 55-year old couple has estimated benefits of $50,000, they’ll need $300,000 from retirement savings.
How much retirement savings do you need? That depends. Do you want to leave a legacy or spend your last dime? Do you want to retire early? A good rule of thumb is you need $1 million in retirement savings for each $40,000 to $50,000 of income you’ll need. In other words, our 55-year old couple needs retirement savings of $6 million to $7.5 million. “Stuff” doesn’t count.
When do you want to retire? Retirement savings don’t grow overnight. This means you need to define a realistic time horizon based on your saving (and spending) habits and ability to achieve solid investment returns. For example, let’s say our 55-year old couple wants to retire at 60. They’re adding $100,000 annually to their current savings of $3,000,000 and earning an average return of 7%. If they continue “as is”, they’ll have $4,782,729 at 60. In other words, they’ll be short by $1.2 million to $2.7 million.
What if you’re not on track? Although it’s better to figure this out sooner rather than later, all is not lost. And, anyone can use these basic techniques.
- Time is your friend. If our 55-year old couple delays retirement to 63, they’ll increase their retirement savings by $1.4 million. Less obviously, they’ll shorten the time period over which their savings must stretch.
- You can earn more. You can work extra hours or invest for a higher return. A word of caution … if you’re close to retirement, you may not be able to assume the higher risk often associated with a higher return.
- You can save more. If our 55-year old couple boosts their annual savings by $25,000 to age 63, they’ll add $256,495 to their retirement savings. Importantly, they may find there’s not much difference between a $325,000 lifestyle and $350,000 lifestyle. And, a $325,000 lifestyle requires less retirement savings ($5.5 million to $6.9 million).
In reality, most people use one or more of these techniques to achieve a secure, comfortable retirement. If you need help creating or refining your retirement plan, please contact a Certified Financial Planner™ or other qualified professional.
For simplicity, the impact of inflation has not been explicitly discussed in this article. But, in reality, it's a major risk factor and must be considered in your retirement plan.
This article first appeared in the January/February 2018 Spokane County Medical Society Magazine. The information referenced in the article is current as of date of publication.