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how much money do I need in retirement

How much do you need for retirement?

It’s one of the most asked questions of working adults, whether they’re 30 years old or 60:

How much do I need to save for retirement?

While it’s one of the most common questions, it’s also one of the most difficult to answer.

First, the crux of the answer depends on who’s asking. Everybody’s retirement income goals, needs and spending habits are different.

Second, trying to determine a set number that you can live on for the duration of retirement is an inexact science because there are too many unknown factors. You don’t know how long you’re going to live. You may incur health problems that can throw a retirement plan off balance. You can’t predict how your investments will perform, what the inflation rate or interest rates will be, what your tax rate might be, or the general state of the economy during your retirement.

A summary of conventional wisdom

Yet despite all these variables, there are a myriad formulas and theories on what people need to have saved by the time they begin retirement:

  • The simplest theories suggest saving at least $1 million to $1.5 million.
  • Others recommend saving at least enough to replace 80 percent of your working income each year.
  • Some experts advise you to save at least 10 to 12 times your working income just before retirement.
  • Another widely held belief is to accumulate enough to survive for 25 years.
  • There’s also the 4-Percent Rule – with multiple variations — which states you can safely withdraw 4 percent of your retirement assets each year. So if you think you’ll need to have $40,000 in income your first year of retirement, you should have $1 million at your disposal.
  • There are hundreds of calculators on the Internet where you can input your age, income and other factors to arrive at an ideal sum of retirement assets.

Are you asking the right question?

One thing these proposals have in common is that no matter what the final number is, most people don’t have it and are way behind in achieving it.

That’s why some advisors suggest changing the question to: What sources of income will I have in retirement and how can I generate more if needed?

Think of it like this. Most people don’t earn enough while working to do or accomplish everything they want. So they prioritize and/or go into debt. If it’s possible, they look for ways to generate more income for the things they want or need.

Retirement will work much the same. You’ll have income that will likely vary each year. You’ll have to prioritize where that money goes, you may be forced into debt, and you may have to look for ways to supplement your retirement income.

Start thinking about your retirement budget

That doesn’t mean you shouldn’t at least estimate what your income needs will be in retirement. Budgeting is just as important in retirement as it is while you’re working.

First you’ll need to estimate your expenses, which will be easier the closer you are to retirement.

Start with actual needs: food, housing, utilities, health care, etc. You’ll want to factor in inflation when making those estimates. You also want to think about how your lifestyle will be different than it is now. For example, not having a regular job means you might save money on gas and buying clothes.

Don’t forget about taxes. With a few exceptions, your retirement income will likely be taxable income, so you’ll want to factor that in as well

A big question to think through is where you will live in retirement. If you decide to retire in one of the seven states without a state income tax – Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming – then you’ll save a little on expenses. Other parts of the country, such as New York and southern California, have high standards of living.

Your retirement planning will also depend on whether your primary residence will be a home you own free and clear, whether you’ll still have a mortgage or whether you rent. If you own a home, how much equity will you have at retirement? When will it be due for a new roof or air conditioner?

Then decide what you want to do in retirement. If you won’t be working full-time you’ll have more time to fill. Will those hobbies and activities cost money? Do you want to travel a lot? Eat out with friends on a regular basis? Visit children and grandchildren?

Next, determine what sources of income you will have and estimate what they will provide. You should have monthly benefits from Social Security once you elect to receive them. If you’re one of the few people left who can count on a pension, factor that in as well.

Other sources of income may include annuities, bonds, or dividend-paying stocks. You may have retirement accounts, bank accounts and CDs from which you can regularly withdraw funds. And just because you’re retired doesn’t mean you can’t work, even if it’s a part-time gig. After all, some people get bored easy and may need to work just to have something to do.

A continuous process

This exercise is not a one-and-deal endeavor. As you get closer to retirement you will have to review your plan and factor in any changes to your account balances, income sources and projected expenses.

The key to having enough for retirement isn’t to shoot for a large number, hope you can save that much and hoping further that it will last.

What generally works is to save as much as you can as early as you can, retire as much debt as possible and cut as many expenses before you retire, and identify multiple sources of income, including those like annuities, pensions and Social Security that can last a lifetime. Then budget wisely and stay well within your means for as long as you live.