How Much do I Need to Retire?

Contributor, Benzinga

Probably the most perplexing question posed to financial advisors is, “How much do I need to retire?”

The short answer is probably, “More.”

You may have heard that you need $1 million in the bank to retire comfortably, but truth be told, that may not be enough, depending on your needs. There is no universal retirement target number because everyone’s financial needs are unique, so take a deep dive into your individual situation en route to retirement planning success.

Here’s how much you may need and where you can start saving and investing for retirement.

Step 1: Set a lifestyle goal

When you picture your life as a retiree, whether that’s 40 or 14 years from now, what does that life look like? Setting your retirement lifestyle goal will determine your financial needs for retirement. It’s not just about making sure your bills are covered; you’ve got to take your lifestyle choices into account as well.

You may find that you plan to continue your frugal lifestyle into retirement but will ramp up your travel and need to add an additional $20,000 a year to see the world. Maybe you’re itching to begin an entrepreneurial encore career or plan to stay busy working part-time. Perhaps your number one goal is to spend time with your grandchildren and you plan to move to be in the same city.

Draw up a blueprint of your retired lifestyle. For example, the chart below shows an estimated breakdown of expenses for a retiree with a $273,000-a-year lifestyle. This increased lifestyle cost comes with an estimated retirement savings need of $4 million.

Planning your lifestyle in retirement. Source: WSJ
Planning your lifestyle in retirement. Source: WSJ

Step 2. Determine your cost of living

Now that you’ve figured out how you want to live, let’s look at how you actually live and look at what bills you need to have covered by your retirement income. If you will have your home paid off by the time you retire, will you keep the same home or plan to move to another city?

If you live in a very expensive city, you could consider moving so you can drop your costs and allow your retirement dollars to stretch further. If your kids will still be in college when you retire, do you have a separate plan to cover their college costs, or does that need to be factored into your retirement costs?

Debt that follows you into retirement can drain your savings, so have a plan to pay debt off before you stop working or plan to save enough to become debt-free during retirement.

Step 3. Set a timeline

Are you looking to be part of the FIRE movement (in which you plan to get out of your cubicle as soon as it is financially feasible) do you enjoy your career and plan to work as long as you’re in good health?

The average American lives 78.6 years, but your life expectancy will really depend on your genetics and health. If you are in good health and your parents lived into their 90s, you may well need to plan for a 30-year retirement.

Step 4. Consider overall targets

Most financial advisors suggest that you need 75% to 85% of your current annual income in retirement. This assumes you will pay less in taxes, commuting costs, work clothes, and other work-associated expenses.

It also assumes you will have paid off your debts and own your home. Alternatively, you could calculate your annual expenses and multiply them by 25 or however many years you will estimate you will live after retirement.

Step 5. Determine your retirement income sources

You’ll likely have several sources of retirement income that will not all draw from your nest egg. Assuming you worked for pay, you can draw Social Security benefits, which average to around $1,400 a month, depending on your income and years worked.

If you’re one of the lucky few to draw a pension, add that benefit into your retirement income stream. If you plan to continue working, even part-time, include that estimated income as well. Ideally, you can live off of your Social Security, pension and possible part-time employment without having to draw too heavily on your cash savings which could be held in a 401(k), individual retirement account (IRA), mutual funds, stocks, annuities, bonds, and other investment vehicles.

Step 6. Get prepared

After you calculate your savings targets, is your planned retirement attainable for you? Can you save what you need by the time you get to retirement? If not, you may need to reevaluate your planned retirement lifestyle to better suit your finances or find a way to increase your savings rate to meet your targets.

Life circumstances may come up that change your retirement plans and needs. For example, if you or your spouse are diagnosed with a chronic illness, you have additional children later in life, you care for a family member with a health issue, or if there is a downturn in the market, you’ll want to be prepared for any eventuality.

Step 7: Start investing in a retirement fund

If you have an employer-sponsored 401(k), you’ll definitely want to start contributing as soon as possible. You can also open up an Individual Retirement Account (IRA) or a Roth IRA.

You can check out some of Benzinga’s favorite brokerages for IRAs and Roth IRAs. Here’s a quick look at the picks.

Get started securely through SmartAsset’s website
get started securely through bitcoinIRA’s website
Best For
New bitcoin investors
N/A
1 Minute Review

Bitcoin IRA provides a solution for those looking to take their retirement account outside the traditional market. It partners with BitGo Trust to facilitate the setup of an individual retirement account (IRA) and a digital wallet to hold and trade cryptocurrency. Bitcoin IRA offers a proprietary always-on, self-directed trading platform that empowers you to invest in your future. In addition to digital currency, you can also use Bitcoin IRA to purchase gold, another popular alternative asset for savvy investors.

Best For
  • New Bitcoin investors who have a handle on their overall financial strategy
  • People who have room in their budget for a $100 monthly contribution for an easy set-and-forget savings and investment strategy
  • Investors who can tolerate high levels of risk associated with trading crypto and who are able to hold precious metals investments for at least 10 years
Pros
  • Great rollover options
  • Investments stored offline for greater security
  • Easily create an account and digital wallet in under 3 minutes
  • 24/7 trading platform
Cons
  • Due to U.S law, cannot transfer existing cryptocurrency holdings into a Bitcoin retirement account
  • No financial advisory or planning services
get started securely through iTrustCapital’s website
Best For
Beginner cryptocurrency investors
N/A
1 Minute Review

iTrustCapital is a self-directed IRA provider that gives you the opportunity to invest in cryptocurrencies, gold and silver through your retirement account. iTrustCapital focuses on providing investors with a straightforward and easy-to-understand platform, which can be a major asset if you’ve never bought or sold alternative investments in the past. 

When you reach retirement age, iTrustCapital allows you to choose whether you’d like to take your disbursements in cash or in the assets you’ve invested in. Though the platform does offer a limited range of cryptocurrencies when compared to brokers like Coinbase, its simple structure and unique IRA offerings make iTrustCapital a great place to invest.

Best For
  • Investors who want to add gold, silver or cryptocurrencies to their IRA
  • Those who are interested in taking a long-term approach to cryptocurrency or metal investing
  • Beginner cryptocurrency investors
Pros
  • Straightforward platform allows you to buy and sell assets in a few minutes
  • Orders clear within 5 minutes
  • 24/7 order placements and portfolio monitoring services
  • Both live chat and phone customer service service available
Cons
  • Limited number of cryptocurrencies to buy and sell
  • No mobile app currently available
get started securely through Charles Schwab’s website
Disclosure: Other account fees, fund expenses, and brokerage commissions may apply.

Final Thoughts

Because you will likely have more than one source of retirement income, you don’t need to be at your target by the time you retire as long as you have a plan to meet it. Interest growth is not just a benefit for the young.

Even after you retire, your money will keep working for you. If you keep your savings contribution to your overall retirement income to a conservative withdrawal rate of 4%, you’ll likely have a higher overall rate of return which guarantees that you aren’t eating into your principal and can live off of the interest gained on your investment every year. Then, adjust that rate annually based on inflation and your needs.

Remember, financial planning is personal and your retirement may not look like anyone else’s. There are so many unique factors for each individual to consider. Some of those factors may even require you to revise your retirement goals.

For example, you may find that your savings cannot reach your retirement lifestyle goal due to a downturn in the market or that it has to shift based on your family needs and emerging health issues. Retirement planning is a moving target, but planning ahead can help you reach your goals, no matter what they are.