By: Christian Hudspeth, CFP®
“When can I retire?”
“How much do I need to retire?”
“Will I ever be able to retire?”
Regardless of how much income people make or the size of their net worth, I’ve seen these questions bring anxiety to hard workers, entrepreneurs, and diligent savers alike.
- The average American believes they need $1.46 million to retire according to a 2024 survey by Northwestern Mutual.
- Money guru Suze Orman says those who want to retire early (40s and early 50s) need $5 million or $10 million.
- Fidelity’s widely-cited rule of thumb is to have 10X your annual income saved by the time you’re age 67.
As a financial planner who helps people get to retirement for a living, I’ve created plans for public-sector workers so they could comfortably retire on as little as $250,000. On the other hand, I’ve seen professionals with millions in savings that would struggle to retire given their spending habits.
So what’s the truth? What “retirement number” do you need to stop working for good or switch to a passion that’s not just for paying the bills?
It all depends on your unique situation! Here are the questions our financial planning team aims to answer as we work to get clients to retirement, regardless of how much they have saved in retirement accounts.
What age do you want to retire?
Time is an exponentially more valuable wealth-building tool than the dollars you’re able to save. For example, a $1 investment earning 7% annually for 30 years could grow to $7.61. By comparison, $1 invested for 15 years would be worth just $2.76 at that return rate.
In other words, you would have to invest almost three times more up front for the 15-year investment to end up with a similar amount as the 30-year investment.
The longer you allow your money to grow — either by investing sooner and/or delaying retirement for later – the better the results.
How long might you live?
It may come as no surprise that the longer you live, the larger the nest egg you’ll need due to extra years of spending in retirement. But how long can you actually plan on living?
You may have seen the average US life expectancy for men is just age 74.8, but that’s for newborns and we don’t plan on that. The reality according to actuaries is: the older you are, the longer you’re expected to live. The average 60-year-old is expected to live past age 80 with a high degree of certainty. It’s even longer if you’re a woman or if you’re married.
What are your living expenses?
My issue with the “10-years-of-income” rule of thumb is the formula relies on your current salary to judge if you’re ready for retirement. But what if you’re only spending 80% of your income and save the rest? Or what if you plan to downsize your home or move to a less expensive country or state? You may not need to have nearly as much saved for retirement in these cases.
What matters more than your income is your spending level. Our team looks at what amount a client is actually living on by separating out retirement plan contributions and other variables like property tax, health insurance, and income taxes which can grow with different rates of inflation or change with tax legislation.
Our goal is to accurately find out what a client needs to stay financially comfortable during retirement, and how to get there without over-saving (see Are You Saving Too Much for Retirement?).
Do you expect to receive Social Security and/or pension income?
If you’re expecting Social Security or pension income in retirement, you may not need nearly as much saved in retirement accounts as you might expect.
For example, a pension paying $20,000 per year is the equivalent of having a $500,000 account paying 4% interest annually. The larger the pension you expect in retirement, the smaller your nest egg likely needs to be. You may only need supplemental portfolio income to pay for emergencies or keep up with the rising costs of living over decades of retirement.
[Read Pensions: Get Income for Life or Take the Lump Sum?]
Do you have a second home, valuable business, or rental properties?
Not everyone follows the traditional path of lifetime saving into retirement accounts.
We see plenty of dentists, lawyers, and successful entrepreneurs who have poured their life savings into making their businesses a success but now need the funds to live on during their golden years. Other clients choose to buy second homes in wonderful vacation spots or invest in rental properties to diversify their income streams.
These valuable assets can be part of the overall retirement plan, either by providing extra passive income at low tax rates or by being sold later in retirement to provide more funds when a client most needs them.
Finding How Much You Need for Retirement
Your retirement number is unique to you and depends on many circumstances beyond just your annual salary. A trusted financial advisor with a talented financial planning team can help you:
- Evaluate your current assets and properties
- Realistically estimate your life expectancy
- Run market simulations and inflation estimates against your portfolio
- Optimize your Social Security benefit and lifetime tax liability, and ultimately…
- Plan your retirement date with a high degree of probability of not outliving your money
Retirement is a decision that could impact you for decades, so don’t take it lightly by taking “rule of thumb” shortcuts. Better to start building a roadmap to retirement that fits your needs — all without having you over-save and with the added peace of mind from getting a professional’s opinion.
*The information presented here is not specific to any individual’s personal circumstances. FMP Wealth Advisers is not providing investment, tax, legal, or retirement advice or recommendations in this article.
**To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
***These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
