Flustered By Finances? Ask Ellen
HOW MUCH IS ENOUGH?
If I had a nickel for every time someone asked how much money is enough to retire on… People want an easy answer. Is it $1 million? Is the magic number $3 million? The truth is, it depends. It depends on your financial asset base, monthly expenses in retirement and sources of income in retirement, such as Social Security and pension.
It pays to fully understand your current expenses to best estimate future retirement expenses. Remember to increase your expectations for health care expenses in retirement and reduce expenses that may go away, such as mortgage payments and children’s expenses.
It makes sense to work with a financial planner who understands the vitally important role that Social Security plays and incorporates Social Security optimization strategies. There are a variety of complex strategies for taking benefits, but the Social Security Administration does not offer them to you unsolicited. There are optimal ways to take your benefit based on your age and health, and for couples there are clever combination strategies that can increase your benefits by thousands of dollars.
Once you have a handle on how much income you will receive from Social Security and pensions in retirement and how much your retirement expenses will be, you can determine how much you will need to supplement any deficit from your assets.
The table below is a simplified look at how much you will need in your retirement pot on Day#1 of your retirement. It assumes that you retire at age 70 and live 25 more years. It also assumes that your investments continue to grow over those 25 years at an average annual rate of 5%. It’s a simplified look for three reasons: (1) it doesn’t account for inflation (or health care cost inflation) - so to be extra prudent, expect your expense requirements to be much higher than you think; (2) it assumes that the markets grow at a consistent 5% per year, when quite possibly when you retire, the market could be in a down cycle- so again, be prudent and plan for a larger pot of money than you think you will need; (3) it doesn’t account for leaving money to your heirs.
So, for example, if you expect your expenses in retirement to be $80,000 per year and calculate your Social Security and pension income at $40,000, you will need to supplement your living expenses with $40,000 per year from your investments. In order to support $40,000 a year of investment consumption for 25 years, you will need about $564,000 at retirement.
There are many customized scenarios for different expectations for retirement age, investment growth rate and income requirements. Nor have I dealt with the really fun part: determining how much you need to invest every year to get to your pot of gold on Retirement Day #1!
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