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How Much Money Do You Need to Retire Comfortably?

    Close your eyes and picture your retirement. You may envision yourself strolling on a tropical beach, working on hobbies around the house, volunteering for a beloved cause, or playing with a grandchild. You probably don’t picture yourself hunched over bills and bank statements, trying to make ends meet. However, without careful planning, your retirement income may not match your desired lifestyle. 

    You may have heard different rules offered by experts: somewhere near $1 million, 10-12 times your pre-retirement salary, or a nest egg that can replace 70-90% of your pre-retirement income. While general rules are a good starting place, arbitrary advice does not account for your unique financial situation and may lead to retirement savings that are too small to meet needs or savings that are larger than needed and come at the expense of your pre-retirement lifestyle.

    Retiring comfortably will mean something different to everyone. Your expenses may be the same, higher, or lower than your current expenses, depending on lifestyle choices and your health. Consider what you expect your life to look like as a retiree.

    Where Do You Plan To Retire?

    Will you remain in your current home or downsize? You may be able to stretch your retirement dollar by moving to a smaller home. Remember that smaller homes typically come with lower utility costs and less expensive home repairs.

    If you plan to move to a different location, make sure you have a realistic understanding of what a home in that area will cost you and what the cost of living will be. The average cost of retirement in different US states can vary by $1 million or more. Coastal beach towns, while appealing to retirees, typically have a high cost of living and a competitive real estate market. If you’re considering moving to an age-restricted community during retirement, look up communities with your desired location and amenities to get a good idea of the monthly fees.

    Some retirees leave the United States entirely, drawn by lower cost of living, beautiful weather, and/or affordable healthcare. However, there are disadvantages to leaving the US for retirement, including distance from family, issues with long-stay visas, and double taxation. If you are interested in expat retirement, careful research and planning can make the transition to your new home smoother. 

    When Do You Plan to Retire?

    Do you envision an early retirement at 55 or plan to work well into your 70s? Your age at retirement will determine your ability to withdraw funds without penalty, your access to federal healthcare coverage, and more. Some key ages to take into account

    • Age 59 1/2: Penalty free withdrawal from most qualified retirement accounts, such as a 401(k) or IRA. Taxes may still be owed, but the 10% early withdrawal penalty no longer applies. 
    • Age 62: Earliest age to claim Social Security. Keep in mind that claiming before full retirement age permanently reduces your benefit amount.
    • Age 65: Medicare eligibility. You can enroll during a 7-month period beginning 3 months prior to turning 65.
    • Age 66-67: Full retirement age for Social Security. Your personal full retirement age is calculated by your birth year.
    • Age 70: Maximized Social Security benefits. Your monthly payment stops increasing if retirement is delayed past age 70.
    • Age 72: Required minimum distribution of tax-deferred retirement accounts.

    If you plan to retire at 62, for example you would need to plan for private health insurance for the first 3 years and may want to rely on other income resources to delay claiming Social Security to full retirement age.

    Do You Plan to Work in Retirement?

    Many retirees today prefer an active retirement compared to retirees of past generations. The average length of retirement is about 18 years. However, a retiree in good health may spend 30 years or more in retirement. Part-time work is popular with retirees looking for a better work-life balance in their golden years. Working during retirement comes with several benefits and downsides to consider. 

    Advantages:
  • Working provides mental stimulation and social interaction. 
  • Better work-life balance with part-time or part-year work.
  • The extra income can fund travel, a grandchild’s education, or social activities. If your retirement savings are lower than desired, part-time work can make up the gap and bolster savings.
  • A chance to explore a favorite interest or hobby not included in your main career, such as working with a historical site, garden center, or non-profit work.
  • Disadvantages:
  • You'll still need to deal with the typical headaches of the workforce like a set schedule, reporting to a boss, and/or dealing with unreasonable clients.
  • Your earnings may push up your income to a point where your Social Security benefits are taxable or may even temporarily lower your Social Security benefits.
  • If you are self-employed, such as a consultant or gig worker, you’ll owe payroll tax.
  • Less time to pursue other goals. Extensive travel or providing child-care for grandchildren may not be possible if you’re still in the workforce.
  • Will You Have Debt or Dependents in Your Golden Years?

    More than half of baby boomers in a Boston College Center for Retirement Research survey intend to enter retirement debt free. However, only one-quarter of retired Boomers are actually debt free. The primary sources of debt in retirement are mortgage debt, student loans, and medical bills. Making debt payments on a fixed income can severely limit your retirement lifestyle.

    Many independent- and assisted-living facilities run credit checks as part of the application process. Retirees carrying large debt loads may have lower credit scores or have trouble making payments. 

    If you are carrying a large debt load and are contemplating retirement, consider making an appointment with a financial advisor to help you plan to pay down debt and bolster savings before leaving the workforce. If you are already retired, part-time employment may provide some financial relief.

    Carrying a low-interest rate fixed mortgage into retirement may make sense in some cases where your nest egg is earning a higher interest than you are paying on the loan.

    If you will be carrying any debt into retirement, your fixed expenses will be higher and you may need to adjust your lifestyle or continue working until the debt is paid off. 

    How Long Do You Expect to Live?

    No one likes to contemplate their own demise. However, a clear-eyed understanding of your realistic life expectancy is essential for retirement planning.  A myriad number of factors influence your life expectancy, including gender, genetics, lifestyle choices, economic status, education, environment, and marital status. While some factors, like your gender and genetics are beyond your control, personal choices like eating healthy foods, exercising, maintaining social connections, and quitting smoking can expand your lifespan. 

    If you (or your spouse) may well live 30 or more years into retirement, you’ll need a much larger nest egg than someone who expects a shorter lifespan. 

    How Much Money Will You Need?

    Your desired lifestyle in retirement will dictate how much of your pre-retirement income you will need to replace. If you plan to maintain your current lifestyle, without adding significant travel or costly hobbies, replacing 80% of your current income may be sufficient. Future retirees who hope to travel significantly or upgrade their lifestyle in retirement may wish to aim to replace 90% or more of their current income. For workers behind in savings who can commit to significantly reducing lifestyle expenses in retirement, a nest-egg that can replace 70% of their pre-retirement income may be sufficient, although not ideal.

    The 4% rule helps get a ballpark figure of what you need to save for retirement. Divide your desired retirement income by 0.4 to determine how large your nest egg should be. For example, if your pre-retirement income was $100,000 per year and you want to replace 80% in retirement, you would need savings/investments of about $2 million by retirement ($80,000 ÷ 0.4). This calculation assumes an average annual return of approximately 5% on your investments (after taxes and inflation). In this scenario, you are withdrawing 4% of your nest egg each year, adjusted for inflation. However, the rule doesn’t account for market conditions or large changes in expenses that could prematurely drain your accounts. 

    Of course, the calculation above does not take into account other retirement income, such as Social Security, pensions, or working during retirement. For an idea of what to expect from Social Security income, see our article Understanding Social Security and When to Take Your Benefits. Treating Social Security income as supplementary to your nest egg can help stretch retirement savings by letting you withdraw less money during downturns in the market and help cover unexpected expenses, like increased medical costs or large home repairs.

    If you’re married, your calculations will need to take into account both of your incomes, desired retirement ages, health, and possible scenarios (like when to claim Social Security). 

    Retirement planning can be stressful as even experts disagree on the right amount to save. After getting a general idea of the lifestyle you plan to lead in retirement, connect with a trusted financial advisor like the team at Ridgewood Investments. Your financial advisors can help you ensure that your savings and investments are on track for your desired nest egg and regularly balance your portfolio to mitigate risk from market conditions. Whether you plan to retire in 40 years or 4 months, now is the best time to start planning. 

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About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.