Nobody can tell you what you need in retirement

I can tell you how much money you need to retire, where you can afford to live, and even how much you can expect to spend. Interested? I hope not.

There is no shortage of the above advice; planners and “experts” abound. Frequently you will also see the holy grail of retirement, $1,000,000 as the desired savings goal.

It’s ridiculousness.

None of this advice has anything to do with you! What matters are your finances, and your retirement lifestyle expectations.

We readily accept the fact you can’t live on Social Security alone, but I know people who were low income all their lives and who are happy with just their Social Security. And that’s the point. What we need, what makes us happy, how we choose to live our lives are unique to us.

If you are the adventurous type and plan to join the half million Americans collecting Social Security while living in another country, your financial needs will be different from someone like me who chooses to stay near my roots in an expensive area of the Country. If you are planning to relocate to be happy, great. If you must relocate to survive, it’s time to reconsider your financial strategy. You don’t want to be a example of “can’t go home again”

There are plenty of sources willing to tell you the best places to move and even your average monthly spending, if your idea of living fits the mold.

Are you going to retire debt free, and stay that way? Your answer has everything to do with your retirement income needs. The time to start thinking about that is before retirement.

You may have heard you need to plan for health care spending equal to $285,000 during retirement. Balderdash, you need to plan for an income that will allow you to pay premiums each month and handle out of pocket costs… if you have any. Actual health care costs per retiree vary greatly just as they do for all Americans.

Medicare plus Medigap premiums average nearly $700 a month for a typical couple, but many beneficiaries pay much more, some less. It’s income based, but you knew that right?

Are you investing that HSA for retirement?

Ask yourself, what spending is going to change when I retire? Will these changes result in lower total spending? You may be surprised to find there is no change. One decline is offset by new spending. Commuting expenses may be offset by increased recreation, hobby spending or early bird specials at a local restaurant. When I retired my health insurance premiums increased four fold. My big new ticket expense is travel.

True, some spending is beyond necessities, but that’s the point. That’s what you have to decide as part of your retirement lifestyle. Bare bones or a comfortable retirement with a few perks.

If you are going to stress over retirement, do so based on your needs and goals. Make a list of your current expenses, including non recurring spending like vacations, or gifts. What will change or you are willing to change when you retire?

Make a new list that reflects what has been eliminated, increased, decreased or added. Now you can start planning with a realistic estimate of your needs.

Oh yeah, one more thing. How much of today’s spending is plastic not paid in full each month? That might not work so well in retirement.

And don’t think you can stop saving. You still need an emergency fund and the means to replenish it. Some experts say extra cash will be there because you are no longer saving for retirement. Okay, but now you need some saving to keep your head above water and not screw with your retirement assets to fix the roof. Or, to weather withdrawals from retirement accounts during a downturn in the markets.

Back to the $1,000,000. That amount can reasonably be expected to generate about $40,000 plus inflation adjustments in yearly income. If you earned $50,000 a year when you retired, and receive $ 32,598 in family Social Security income, do you need a million dollars? In theory, you could retire with 100% income replacement on a nest egg of about $435,050 On the other hand, if you were earning $150,000 at retirement, $1,000,000 is likely insufficient.

According to the multiple of income theory, if you are age x you should have $y. For example, at age 67 you should have at least ten times your salary saved. The median income at age 67 is $50,000, so that equals savings of $500,000; a far cry from $1,000,000. No matter, nearly one in five Baby Boomers have less than $5,000 saved for retirement and 20% have less than $5,000 in personal savings. Now that’s both ridiculous and inexcusable. I bet acquiring stuff got in the way for many. [you may want to put the 16 money wasters link here]

Income replacement? You need 80% of pre-retirement income; no, 65-70% or my theory, strive to start retirement with 100% base pay replacement. In any case, you are unique. No general percentage will meet your needs, unless your plan is to fit your spending to someone else’s theory. And by the way, your goal is replacing the income you have at retirement, not some lifetime or even last five year average.

What about estimating your future retirement income? For most people it’s simple.

1. Use a Social Security calculator for a reasonable estimate of future benefits. Of course, the closer you are to retirement the more accurate this will be. 57% of workers have not checked checked their benefits.

2. If you have a pension, check your accumulated benefit regularly, you should receive a statement at least once a year from the plan sponsor

3. If you are accumulating assets in a 401k or IRA take either your savings goal or your actual account balances and estimate the income they may generate by either using the 4% withdrawal rate or plug your numbers into an annuity estimator. For example, a 67 year old male buying an immediate annuity with $500,000 might expect $2,750 per month for life. Notice that is far more than the 4% rule. Decisions, decisions and perhaps the need for professional guidance.

4. Add, 1,2, and 3 You now have a rough estimate of your income. How does it match with your expected living and playing expenses?

If there is a significant mismatch, get cracking. Excuses in your 40s don’t buy groceries in your 70s.

You are unique. You need to do your own planning, and take the appropriate action. You can’t base your retirement life on surveys, averages or theory. And I dare say, you can’t ignore planning, take a shot in the dark and hope for the best, although that appears to be the strategy too many Americans are following.

One comment

  1. I can give advice that will work for every American. Simple. Save more than you believe you can afford to forego from current spending from each paycheck. If you have access to a retirement savings plan, save more than you believe than you are willing to earmark for retirement, then, as necessary, access those monies (via plan loans, not distributions) and don’t forget to repay the plan loans.

    No estimates or projections needed. Once you get to be 55 or older, assess your finances no less frequently than once a year to determine if you can afford to retire.

    At some point, you will come to the conclusion that you can afford to retire, or you won’t. But, you will have set aside as much as you could along the way to retirement.


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