“Will I have enough money saved to fund my retirement?” is one of the most common questions that estate planning clients ask. This is because no one wants to run out of money after they are too old to work and earn more.
Here are some questions that you can use to help determine how much you will need to fund a happy and worry-free retirement:
How Do You Want To Spend Your Retirement Years?
If you want to travel, pursue expensive hobbies, relocate to a luxury retirement community in Florida, or otherwise live extravagantly, you will obviously need more money than if you intend to downsize and retire to a community where the cost of living is low. Therefore, to estimate how much money you will need for retirement, you must first decide how you will spend your time.
How Much Will Your Retirement Cost?
If you intend to spend more money during retirement than you are currently spending, how much more? If you intend to spend less, how much less? It’s difficult enough to estimate how much money you will spend next month, not to mention years from now. So, if you can’t come up with an estimate, simply use the amount you are currently spending. If you don’t know that amount either, start tracking it.
The 4% Rule
One easy way to estimate how much you will need to fund your retirement is called the 4% Rule. This rule recommends investing half your savings in stocks and the other half in bonds, so that you can withdraw 4% each year without ever dipping into the principal.
For example, if you think you will need $5000 per month during retirement ($60,000 per year), you will need to invest $1.5 million ($60,000/ 4%) in order to withdraw 4% every year, for the rest of your life, without exhausting the principal.
Another way to calculate how much you will need to invest is to multiply your annual need by 25. So, using the example above, you will multiply $60,000 per year by 25 to arrive at $1.5 million that you will need to have invested in order to spend 4% each year without exhausting the principal.
However, you arrive at the total amount of money you will need to invest, the logic behind the 4% Rule is simple. If you invest your funds as suggested (50/50 stocks and bonds), you should enjoy about a 7% return annually. This should make it easy for you to withdraw 4% every year without ever going broke, even after you account for inflation.
If the market takes a turn for the worst and your investment returns are lower than expected, you can simply lower your future withdrawals until your investments are doing better and you can increase your withdrawals to 4% again. Similarly, if early during your retirement years you need to spend more than 4%annually, simply reduce your future withdrawals to compensate.
How Much Social Security Will You Get?
Other sources of income, such as Social Security, can significantly reduce the amount of money you need to invest in order to make the 4% Rule work for you. To find out how much Social Security you can expect to receive during your retirement, simply visit The Social Security Administration’s website and use their Retirement Estimator.
If you estimate that you will get $2500 per month in Social Security, then you only need another $2500 per month to reach the income target of $5000 per month used in the example above. This also means that, per the 4% Rule, you will only need to invest $750,000 instead of $1.5 million.
Are There Other Ways To Increase Your Retirement Savings?
One of the most logical ways to increase your retirement savings is to downsize and save the difference. For example, you can move to a smaller home and/or buy a cheaper vehicle. Then you can invest the money saved towards your retirement.
Another way to have more money for retirement is to extend your working life to be entitled to a larger Social Security check. Perhaps you can even work part-time while you are retired. Things like these can significantly change how much savings you will need in retirement.
To conclude, no two people are the same, and neither are their retirement goals. What’s most important is that you:
- Take a step back and assess your current financial situation;
- Decide how you want to spend retirement years; and
- Do your best to save the funds you will need to live out of your life that way.
The earlier you begin to save, the more likely you are to reach your goal.
For a more detailed answer to the question “How much money do I need to fund my retirement?” and to learn more about retirement planning, contact an experienced estate planning attorney to arrange a free consultation. For help getting started with your estate plan, contact us or sign up below for one of our events.