As a financial advisor, this is a frequently asked question. How much money do I need to save to retire comfortably? In other words, what is my number?
Much has been written about this topic. Schwab recently released a survey of 1,000 401(k) participants across the country indicating that on average, Americans believe they need $1.7 million to retire. That may seem like a reasonable number, but is it? A recent CNBC poll showed that two-thirds of U.S. workers are either very or somewhat confident that they will be able to live comfortably throughout retirement. However, a study by the Employee Benefit Research Institute showed that only 42% of Americans have done any retirement calculations. And on top of that, according to Fidelity, the average 401(k) balance in the U.S. is $297,700 which is a far cry from $1.7 million.
So, where is the disconnect and how can you actually determine what your own “number” is?
Although every person’s situation is completely different, there are really five things to consider when determining how much you need to save for retirement. The impact of underestimating any of these factors could be catastrophic, so this is not the time for optimism. This is the time to be very clear-eyed about setting your goals and expectations. Let’s get started.
#1 – How much money will you spend when you retire?
No one likes to compile a budget, so try to avoid using that word. Instead, think about how much money you are spending now. There are many online tools that can help you get to this number fairly easily without pulling out a pencil and paper. Do not assume that you will spend less at retirement. In fact, many spend more (at least initially) on travel, entertainment, etc. Determine the lifestyle you want and then consider what kind of monthly income that will require.
#2 – When will you retire?
Again, be realistic about this. Another study from the Employee Benefit Research Institute showed that 38% of workers expect to work until age 70 although only 4% actually do that. Other things tend to get in the way of working longer (unexpected health problems of the worker or a family member, corporate downsizing, etc.). And, if you retire earlier, you will need to have more money saved because you will have fewer years to save for retirement and more years during retirement. Make sure to build in a cushion for this and look at working until age 70 as a luxury that you may be able to accomplish, but build in a contingency for potentially retiring earlier.
#3 – How long will you live?
It is important not to underestimate this. Consider your own health, but also your family history. According to the AARP, the fastest growing segment of the U.S. population are those over age 85 and the second fastest growing segment are those over 100. In our own firm, we assume a longevity of 95 years for everyone. Living a long, healthy life is a blessing, but don’t let it be marred by financial stress because of short-sighted longevity planning.
#4 – What will your healthcare needs be?
A related note to longevity is healthcare costs. According to a 2017 study by Fidelity, the average American retiring at age 65 will need $275,000 to cover their medical expenses through retirement. That puts a big dent in the $1.7 million nest egg! Healthcare costs have been outstripping inflation for many years and are highly unpredictable. That is why medical bills are the #1 cause of bankruptcy in the U.S. Furthermore, building in a cushion for this as part of your “retirement number” is a critical part of retirement planning.
#5 – What will the impact of inflation be during retirement?
Although inflation has been hovering around 2% for the last 10 years, over the last 50 years it has averaged 3.67%. That may not seem like a big difference but it does have a big impact on retirement. An inflation rate of 3.67% means that your cost of living will double approximately every 20 years. And, that does not take into account things like healthcare expenses, which are increasing at a faster rate. The bottom line is that no matter how much you save, your investment portfolio needs to be positioned to stay ahead of inflation in order to maintain the same buying power throughout your lifetime. To provide for your spending needs over a potentially long life, you will need some exposure to both the equity markets and the bond markets. This will help your portfolio keep pace with inflation and generate the income needed during retirement, while cushioning market volatility.
All of this is to say that retirement planning is not really about a fixed, “one size fits all” number. It is about being realistic about your own goals and expectations while determining what will give you the peace of mind that your retirement years will be exactly what you desire. You actually do have a retirement number, but it is yours and yours alone. At Atlanta Financial, we have a comprehensive approach to planning for your retirement through our Retire-ReadyFIT™ program, so contact us to discuss how we can work together to determine your number to ensure your retirement is everything you want it to be.