By Cameron Swindler, Associate Financial Advisor
Retirement Rules of Thumb:
- Million Dollar Milestone: A convention formerly praised by financial advisors was that a nest egg of one million dollars should be sufficient to last you through retirement. Although a benchmark like this may help motivate you to save, a fixed goal does not allow for flexibility in changing life circumstances, like substantial pay raises at work or increased expenses near retirement age. It also does not account for the deteriorating value of money due to inflation. Furthermore, for many people, a million dollars just isn’t a realistic amount to live on for 30+ years of retirement.
- Income Multiplier: A more flexible method of calculating how much you should save is with a multiple of your current income that increases as you age. For example, when you’re 30 years old aim to have an amount equal to your current annual income saved. By the age of 40, have 3 times your annual income saved. The ultimate goal is to save 10 to 12 times your current income by the time you retire. This system ensures that your retirement goals reflect changes in your ability to put away money as you age.
- Replacement Rate: The Replacement Rate method accounts for both your pre-retirement income and expected expenses once you retire. The idea is that your goal should be to save enough money to “replace” your current income by a rate of approximately 75% upon retirement. For example, if you make and live off of $100,000 a year before retirement, you should save enough to have a yearly allowance of $75,000 in retirement.
- The 4% Rule: The 4% rule works by estimating your post-retirement, annual expenses and building enough of a retirement fund that you only withdraw 4% of it to cover those expenses. The assumption behind the 4% rule is that if you only require 4% of your retirement fund annually, then, if left invested, the rest of your retirement will outpace inflation in most market conditions and last the rest of your life. For example, if you have 2 million dollars saved for retirement, you’d only want to withdraw $80,000 a year.
Retirement Considerations
Before you decide on one of the retirement rules of thumb, it’s important to consider, What do you expect your retirement to look like? To help you envision your retirement, here are some important questions to contemplate:
Lifestyle
Will your lifestyle or standard of living change when you retire? If you are accustomed to taking extravagant vacations every summer or flying across the country to visit family every holiday season, will you have enough saved to maintain that after you stop working? Where do you plan to retire, and what’s the cost of living there? Do you plan to eat out more or cook at home now that you have more time?
Expenses and Debts
Do you plan to have any outstanding debts or large expenses such as car or mortgage payments? What expenses do you think will decrease once you retire? Will you be paying less for gas since you are no longer driving to work?
Retirement Income
Do you plan to have any money coming in during retirement from social security, annuities, or passive income from investments or property? Will you fully retire, work part-time, or work any gigs as you age?
Life expectancy
How many years do you think you will need to save for retirement? Is there a history of relatives living well into their 90’s? Do you have a family history of medical problems, and do we need to account for increased medical expenses as you age?
There are a lot of variables when it comes to assessing how much you need to save for retirement. The bottom line is that everyone’s story is different. There is no one-method-fits-all answer to the question of how much I need to retire. If you need help navigating your situation and want to know the best ways to save for retirement, please reach out to an advisor here at Haris Financial Advisors and schedule a free consultation with us.
