How Much Money Do You Need To Retire?

For some of you, retirement probably seems a long way off. For others, maybe it’s right around the corner. So, when you think about how much money you need to retire, what should you consider? And is there something you should do right now to start planning for your future?

While these are indeed important questions, there isn’t really a one-size-fits-all answer. Our different work histories, preferred lifestyles, and what we consider basic needs make retirement planning even more complicated.

A few retirement money questions

“I’m self-employed. What are my saving options?”

“How much of my income should I put into a retirement plan?”

“Should I max out the employer match?”

“Where should I invest my retirement money?”

And also:

“But what if I need to use my retirement savings BEFORE retirement?”

“How soon can I start using my retirement money?”

“When do I have to start withdrawing my retirement money?”

“How do retirement plan withdrawals get taxed in retirement?”

NOTE:  You can research these for yourself online as well as in some of the articles at the end of this one. Or feel free to ask & I’ll do my best to help. 🙂

Thinking about money you need to retire

I suggest that you take out a piece of paper or begin a new page online and jot down some off-the-top-of-your-head answers. Don’t worry about getting everything right. You just want to start the thinking process.

When do you want to retire?

One of the first questions to ask yourself is when you ideally would like to retire. Is there a picture in your mind of some date when you say “enough!” (Don’t worry. We will revisit this later on to see if it’s actually possible.)

Does retirement include part-time or full-time work?

I ask this to see if your picture includes any extra income (cash flow) coming in to help with your monthly expenses. This will help us determine how soon you might need to start dipping into your savings. We’ll also want to estimate about how much of it you’ll need to use each month.

How much savings will you have?

To figure this out, first look at what you have in savings now. Then add in what you expect to contribute to both regular savings and retirement savings until your retirement. Also think about any other money that might be coming to you from any source.

Now, subtract any major investments or things you plan to buy up until then that will require you to tap into your savings. Remember, on the upside, to factor in expected investment growth and interest you will earn.

But also remember anything in the stock or bond market can be down when you need it. The comforting thing is you don’t need it all on day one.

What income do you expect to have at that time?

Think about any social security checks, pensions, income from savings and investments, part-time or full-time work, and any other sources of income that seem fairly certain. Then come up with a dollar amount that shows you about how much you expect to get each month.

Let’s think about your monthly expenses

How much money you need to retire will depend largely on how much money you will actually need to spend each month (on average) to live. So we need to look at your current expenses, as well as any additional things you think you will need once retired.

Now we need to make some adjustments to that simple estimate, to help come up with a monthly “cash flow out” prediction.

• Think about anything that you expect will change significantly. For example, if you pay rent, you have to factor in rent increases. But you may also decide to live somewhere less expensive. Or you may move to a place where you don’t need a car.
• Remember things like increases in health insurance, which you may be eligible to get from Medicare. But if you retire early, make sure health care insurance is in your budget — along with some increase in what you spend on health and perhaps dental costs.
• Really see yourself in that future retirement picture. Then add or subtract anything that you can think of that could affect your regular monthly expenses.

And now let’s err on the side of caution

Ideal is one thing. But life rarely goes exactly as planned. The same holds true for money you need to retire. So maybe add a bit of a “contingency” cushion to your estimate of how much money you will have coming in and how much you’ll have going out.

By that I mean maybe the monthly cash flow in will be a little less, and maybe the cash flow out will be a little more. Just for now, as we look to plan for the future, try to keep the numbers as realistic as possible.

So how much will you need to retire?

Looking at your estimates of cash in and cash out, you also want to get a picture of the timing of things. Every month may not be the same. And so when you are thinking “will I have enough cash?” it may help you to try creating a cash flow spreadsheet.

⇒  EXTRA:   How To Create a Cash Flow Spreadsheet

 

Using the spreadsheet, you can now see more easily where gaps could arise. Or, you may see that every month has a gap. And if that’s the case, unless you are sure you have more than enough savings to keeping drawing from after you retire, then you have three basic choices:

• Find more ways to bring in extra cash once you retire
• Make peace with cutting your expenses way down in retirement
• Hold off your retirement until you can afford it by both earning more and saving more (factoring in the bonus of increased social security as well as extra savings for the time you wait)

A few more thoughts

When it comes to figuring out the money you need to retire, you want to spend enough time really thinking this through. What I gave you are some simple exercises to get you started. But only you know how close you are to your ideal dream — and if you might want to start making changes now.

⇒  Retirement Reality: So What Happened To The Dream?

PLEASE don’t let this depress you if your numbers seem ridiculously far from your dream. If that’s the case, think of it as a great wake-up call — and a helpful reminder to start dreaming up paths to a new future picture. You never know … it might even spice up the current picture.

You can always look for ways to boost the savings side. But you can also get excited about coming up with ways to boost your income, even if it takes a while. Starting now by learning new skills or starting a part-time business — or even career change — can get you closer to your dream!

⇒  EXTRA:   You Can Use Transferable Skills for Career Change

 

Posts to help you plan (from my finance site)

What’s the Difference Between a Roth IRA vs Traditional IRA?

Advantages of SEP IRA Plans for Freelancers

 

Sample Cash Flow: How To Create a Cash Flow Spreadsheet

Sample Budget: How To Create a Budget Plan Spreadsheet