How much is enough for retirement?

First of all, it's not the full question. The question should be "How much is enough for retirement for me?"

It’s impossible to pick a general number that one should gravitate to because there are multiple variables at play, including projected sources of income, projected expenses, growth rates (and variability of that rate) of assets, inflation rate, timing of retirement and longevity plans.

Income could include social security, pensions, rental income, part time employment income, etc. Planning retirement expenses can be challenging for some because many people don’t know how they spend today. But for someone who does, a starting point might be to use 80% of that ongoing spend in retirement and adjust from there based on individual factors.

Growth rates of assets is of course an unknown, but a fair starting point might be to use a 5%-6% planned growth rate. Typically, we’ll assume an inflation rate of 3% for retirement planning. The impact of this is often underestimated, as a rough example if a 65 year old changes nothing in their spending between ages 65 and 90, expenses will roughly double.

Timing of retirement is an important factor because it’s a variable you can choose to change depending on the other factors. The shorter the time to the goal, the fewer years you have to make up any shortages, and also the lower your return assumptions should be.

Finally, if there are reasons you feel your longevity might be different than average that should be considered. Generally speaking, the shorter the longevity plan the faster you can plan to spend down your assets. Roughly, you can compare your planned income sources with your planned expenses on an average annual basis. Once you get that number, divide it by 0.04 and the resulting number is a very rough estimate of the number you may need at retirement. Then you can use a future value calculator to determine based on your current savings rate, growth rate of assets and number of years whether you are on pace. Let’s use an example.

A 50 year old couple has calculated that combined social security and pension incomes will be $7,500/month in retirement. They estimate that their ongoing expenses will be around $13,000/month, including health insurance before Medicare starts, a continuing mortgage and $20,000 in annual travel only between the ages of 62 and 82. The numbers won’t be perfect because the mortgage and the travel will stop, and the insurance only lasts a few years. But to just get a rough idea they could take $13,000-$7,500 =$5,500/month shortfall. $5,500 x 12 = $66,000. $66,000/0.04 = $1.65 million. For this client, that’s a very general starting point for estimating needs.

They want to retire at 62. They have $425K right now and between them are saving $25K annually and wish to use a 6% return assumption. Using a future value calculator, they are on pace to accumulate a little under $1.3 million, so using the rough estimate above they are not on pace to achieve the goal. Again, recognizing this is really rough work and many factors can affect it, the client has choices with respect to the variables. They can’t really rely on a change the return and inflation assumptions. But they can change the amount they save today, the date they plan to retire, or their planned retirement date.

In this case, delaying by 4 years to 66 would likely work as that savings rate would get close to the $1.65 million. Likewise, reducing the spending gap number from $5,500 to $4,333 would also work; this could be achieved by increasing the income assumption, reducing the expense assumption or a combination. Or they could combine the delay and the spending change to come up with a different plan.

Conversely, if they were on pace to exceed the goal, they also have options. Maybe they want to consider retiring a year or two earlier. Or they could plan to spend more on either travel or ongoing expenses. Or they could save less now because they could actually use some of that $25,000 for shorter term things like funding kids’ education, etc.

In another example, a current retiree might determine they have more than enough to cover their basic needs or even discretionary needs, and this might allow them to consider annually gifting to adult children or grandchildren, so they can see the impact of the gift while they are alive. The point is once you have a general idea of where you stand, you have the ability to make informed choices.

Is that median balance of ~$250K enough? It might be, if you think you will only need $10,000 ($250K x .04) annually from your investments in today’s dollars for the rest of your life. None of this is a replacement for what we do for clients, which starts here (but is individualized) and is an ongoing lifetime process. Hopefully this is generally helpful, but we'd love to help create an individual plan for you to get a clearer picture and outline options based on your priorities.