When can you afford to retire?
Our clients often come to us wanting to know a set figure or amount to save that will mean they can retire. But it’s more complicated than just how much you have in your savings. There are lots of different factors to consider when creating a financial plan for a stress-free retirement.
In this post, we’re going to look at two example scenarios to show you what other variables impact your retirement savings and why the amount you’ve saved doesn’t necessarily mean you’ll have a better or longer retirement.
You can watch the video on this topic above or, to listen to the podcast episode, hit play below, or read on for more…
How much money do I need to retire?
The amount you need to have saved to retire is entirely dependent on your situation. No fixed amount or formula applies to everyone. Even if you had saved a million dollars, you’d still have to work through all the different variables to find out if it was enough for you to retire.
There are many variables and things to consider, including:
- What age you want to retire
- Your spending
- Healthcare costs
- Your guaranteed income
When you want to retire has a huge impact on how much you need to save. You should consider both your savings and your spending habits whether you want to retire early or closer to retirement age, around 66 or 67 when you’ll receive Social Security.
Your spending is one of the biggest factors influencing your financial retirement plan. Living within your means before and after retirement is crucial to managing your money with longevity in mind.
Inflation also plays a part in how much you’ll need to retire. It’s been relatively low over the last decade, but inflation can change at any time. We set inflation at 3% for our retirement plans. This is the average inflation rate over the last 100 years. If inflation rates do rise higher than average, this typically only lasts for a short period and then readjusts. But it’s something to be aware of, as it will impact your spending and your savings.
Another factor that we cannot necessarily plan for is future healthcare costs. If you need long-term care or face health challenges in the future, it could take a chunk of your savings. While you can’t always prepare for these things in advance, you can take financial precautions, such as taking out insurance.
The one variable you can count on is how much guaranteed income you’ll have in retirement. Most people will have a pension or Social Security. Knowing how much guaranteed income you have in place helps you figure out how much extra you’ll need to save to cover your expenses.
How much you should save for retirement
We’re going to show you two scenarios to better understand how some variables affect savings and why it’s important to manage your money properly in retirement.
In the first scenario, there is Mary. Mary is 60 and has saved one million dollars ($1,000,000).
In the second scenario, there is Susan. Susan is 67 and has saved half a million dollars ($500,000).
Which do you think is going to have a longer retirement based on their age and savings?
Let’s run through these scenarios without changing any factors other than the amounts that each have saved and their ages. In both scenarios, the retirees will get $3,000 of Social Security each month, starting at age 67.
Scenario one: can I retire with a million dollars?
At age 60, Mary retires with one million dollars in IRA assets and has a spending plan of $6,500 a month. That means she needs $6,500 of guaranteed income coming into her bank account every month to pay the bills and live the life she wants to lead.
In both scenarios, the retirees are facing an inflation rate of 3%. This means that Mary’s spending is increasing by 3% a year. After ten years of retirement, inflation alone pushes Mary’s $6,500 up to $9,000 of spending each month.
Mary has invested her one million dollars, so it’s increasing at 5% on an annual average basis. This grows her savings at a decent rate of return, but she is withdrawing these funds to cover her rising costs. Mary has to rely solely on her savings immediately after retiring, as her Social Security payments won’t start until she’s 67.
There are some other factors at play, but to keep this simple, based on Mary’s spending and inflation, it will take only 13 years for her assets to run out. Mary will still have her Social Security payments, but these aren’t nearly enough to cover the lifestyle she’s built and grown accustomed to.
So, even though Mary retired with one million dollars at age 60, which seems like a powerful position to be in, she only makes it to age 73 before she has no more savings.
Scenario two: how much do I need to retire at 67?
Now let’s look at the second scenario. Susan retires at age 67 with half a million dollars saved in an IRA. Susan immediately gets $3,000 of Social Security each month, just like Mary did at 67. But Susan also has a pension of $500, taking her guaranteed income up to $3,500 a month.
Susan wants a different lifestyle from Mary. She plans to spend only $4,000 a month – $2,500 less than Mary. By the time Susan is 80, inflation will push her monthly spend up to $6,000 a month, still less than Mary’s original monthly spending.
In both scenarios, inflation does make a big impact. But for Susan, inflation isn’t as detrimental to her savings. Susan needed to take less out each month than Mary to supplement her guaranteed income and so it’s a more manageable withdrawal over the long-term.
In this scenario, Susan’s spending habits mean she can comfortably maintain her lifestyle in retirement past age 90 before she runs out of her assets.
How to manage your money in retirement
Retiring later, having a pension (even if it’s small), and reducing your spending can make a significant impact on how long your assets will last you. Even though Susan had saved half the amount Mary had, she had a far longer retirement plan because she retired seven years later, took a small pension, and reduced her spending budget.
If Mary had reduced her monthly spending by $1,500 to $5,000, it would have added almost ten more years to her retirement plan. This reduction alone would mean that she’d be 82, instead of 73, before her assets run out.
Your spending is arguably one of the easier factors to change within a retirement plan. It can be very helpful to take a good look at your spending habits now and consider what they’ll be in the future so that you can get an idea of what your retirement could look like.
How to plan your savings for retirement
If someone has saved more money than you for retirement – don’t panic. People have very different circumstances. They may need more money to cover costs or plan to spend more in retirement. Having more savings doesn’t necessarily mean a longer, more worry-free retirement.
A written retirement plan can help you understand how all of these factors will affect your situation and prepare accordingly. It gives you peace of mind that your finances are set for your future.