How Much Do You Really Need to Retire?

This post was last updated on July 30, 2022, to reflect all updated information and best serve your needs.

Have you ever considered how much do you really need to retire? While this is a simple question, the answer is anything but clear cut. There are many factors that go into your retirement target number.

As a financial planner, this is one of the questions I often get from clients. There are many online calculators trying to help the average person get a ballpark estimate of the nest egg needed to retire.

Instead of giving you a formula for coming up with a number, below are some points to consider when coming up with your retirement budget.

What’s Your Retirement Number?

Your retirement number is the assets you need to have available to you to fund your annual retirement spending. This could be money in retirement accounts, a pension, an annuity, investment and dividend income, and so on.

This number is different for every person or couple and depends on a number of factors. Many experts assume that you will maintain close to your current level of spending. The number they throw around is usually between 70 and 80 percent of income.

However, there are a number of problems with that approach. Let’s look at some factors that play into your retirement number and how to account for them.

Need help navigating your retirement income options? Get your free retirement income plan today!

Look at Your Assets

Before you can come up with a number for your retirement, you need to review your assets. These include properties, trust funds, annuities, social security, and other potential income sources that you can draw down in retirement.

Income vs expenses

One of the biggest problems when planning for retirement is looking at income rather than expenses. Just because you make $150,000 per year during your working years doesn’t mean you need the same amount annually to fund your retirement.

Your expenses are hopefully less than your income, lowering your income requirements later in life. In your working years, you need to account for expenses such as commuting, work clothes, and retirement contributions. These should all go away in retirement, further shrinking how much you need annually.

Once your kids leave the house and graduate college, you no longer have to account for child-related expenses. Many retirees also pay off their mortgage or downsize, which reduces monthly housing expenses.

Many retirees also find themselves in a different income bracket when they retire. This can affect how they draw down their retirement assets to maximize tax savings.

In addition, once you reach retirement, you won’t be putting money toward a 401(k) plan or an IRA. Instead, you will be drawing down on your assets and figuring out the best way to minimize the taxes you pay.

When you work on your retirement budget, consider which expenses will no longer be needed in retirement. Expenses that are related to working full time, kids, certain extracurricular activities and so on.

Separate your actual expenses from your income. Think about which ones you will continue to pay in retirement and which ones will no longer be necessary. This will help you get a better idea of your actual income needs.

Need help navigating your retirement income options? Get your free retirement income plan today! 

Retirement savings and equity

Another piece of the puzzle is your retirement savings. This includes money on your employer’s 401(k) plan, IRAs, and other retirement savings. Depending on the type of account you have, it comes with its own set of rules on taxes in retirement.

If you have any properties, consider the equity you have and if you plan to use it to fund your retirement. This may include equity in your primary residence, a vacation home, or investment properties.

Do you have any rental properties? How will this income play into your retirement planning strategy? Some people opt to continue renting out properties but may shift to using a property manager to offload some of the work and have more time to relax.

How you access this equity is another point of consideration. You may opt to sell or rent out any properties and then invest the proceeds. Any sale of assets should be timed to minimize your tax burden.

You may also elect to tap the equity in your home through a reverse annuity mortgage, also known as a reverse mortgage. It’s a loan that provides regular monthly payments to homeowners.

Other income sources

If you are one of the lucky few whose employer offers a pension, consider how this plays into your retirement plans. Depending on the state of the Social Security program at the time of your retirement, you may want to add your expected monthly benefit into your calculations.

For those who own their own business, consider an exit plan and how that may affect your retirement savings. If you can sell your equity in a business, you can use the money to put toward funding your golden years.

Don’t forget to include other sources of income such as an inheritance, trust funds, annuities, and so on.

Work in retirement

Some people also plan to work part-time or in a consulting role. This could be either to fill in the gaps from other retirement savings or as a way to keep themselves sharp. Either way, make sure you include any income from work into your retirement calculations.

Working in retirement can also give you access to company-sponsored health insurance and other benefits. It may also affect your tax bracket. It’s important to consider how work, even a part-time gig, can affect your retirement income.

Consider Retirement Spending

The other side of your retirement number is how much you will spend. This is where coming up with a tentative retirement budget can go a long way toward helping you plan for expenses. Below are some things to consider including in your budget.

Everyday expenses

Your everyday expenses will form the basis of your retirement budget. This includes regular recurring costs such as utilities, property taxes, groceries, insurance, and so on.

Since you won’t be going into an office, you can take out work-related costs such as dressy clothing, gas, tolls, and other work-related costs.

If you plan to downsize, you can lower your projected costs for utilities, property taxes, and other home-related expenses.

Keep in mind that these costs will increase with inflation. Review your projected budget as you get closer to retirement to make sure you have the most up-to-date number.

Travel and fun  

Many retirees plan to travel in their golden years. While you probably have a vacation budget built into your current annual spending, traveling in retirement will be a bigger line item.

Traveling for longer periods of time will quickly add up. In addition, as you get older, you tend to go for pricier accommodations and experiences. It’s important to be realistic about your spending and budget accordingly to avoid unpleasant surprises.

Helping family

One expense that many people forget to include in their retirement planning is helping family. This could be caring for elder parents or helping fund college accounts for grandkids. Since your resources in retirement are limited, you need to account for all monetary spending.

If helping family is important to you, just build this into your budget. That way you can offer support without worrying about the impact on your finances.

Healthcare spending

Spending on healthcare is one of the big unknowns in retirement. As people get older, they tend to have more health problems, requiring expensive medications, increased medical attention and hospitalization.

While eating healthy and exercising can go a long way toward reducing or minimizing health expenses, this becomes increasingly difficult as you get older. Make sure to factor monthly Medicare premiums into your budget.

Many retirees also opt to pay for supplemental or gap insurance should be factored into your monthly budget. In addition, make sure to account for deductibles and out-of-pocket maximums. One study by Fidelity estimated that retirees need to budget $285,000 per couple for medical expenses in retirement in today’s dollars.

Long-term care

The cost of long-term care can put a big dent in your retirement savings, especially if you didn’t plan for the expense. As people live longer, they need more care later in life, which means more money saved for retirement.

One way to plan for this cost is to consider long-term care insurance. This can help offset the price tag of expensive facilities but comes with its own steep price tag. Make sure to review the pros and cons of taking on this expense.

If you decide to go with LTC insurance, build in the expense into your retirement budget. If not, include a cushion that can help you pay for long-term care needs for yourself, your spouse, or aging parents.

How long will you live?

Increased longevity comes with added costs - and not just in health care expenses. The longer you live, the longer you will need your nest egg to last. While no one knows how long they will live, look at your direct relatives as an indication of what to expect.

If your parents, grandparents, aunts, and uncles lived well into their 90s, chances are you have many years to look forward to in your retirement. If you have many family members who passed away young because of hereditary diseases such as diabetes and heart problems, take heed.

Living a healthy life and exercising can help you combat these diseases to a degree. It will also keep you strong and active, minimizing falls and other age-related problems.

Talk to your doctor about your family’s health history and what you can expect in your later years.

Unexpected expenses

While you may think you have made a comprehensive plan that covers every single possible expense, that’s never the case. There will always be unexpected expenses that will put a dent in your budget.

While it’s good to be as detailed as possible, include a cushion in your budget for unexpected expenses. If you don’t end up using it - great! Just roll the amount over every year and sleep better knowing you have money to cover emergencies.

Need help navigating your retirement income options? Get your free retirement income plan today! 

Consult with a Financial Advisor

There are many things to consider when planning for retirement. Coming up with how much you need to have saved for your golden years depends on a number of factors. This is where talking with a qualified financial advisor can be invaluable.

They can help you define your financial goals and come up with a plan for reaching them. From saving enough for retirement to funding your child’s college education, an advisor can put together a financial blueprint that addresses what matters most to you.

Reviewing your finances will give you peace of mind knowing you’re headed in the right direction. A financial advisor can provide guidance about your retirement budget and how to plan for big expenses in your later years.

They can answer your questions and guide you through the steps you need to take to organize your finances. This includes tax planning, estate planning, business exit planning, and so on.

The Bottom Line

When looking for a target number for retirement, there are a number of important factors to consider. While retirement calculators can give you some idea of how much you need to save, there are many factors that go into your retirement number.

This is why it’s important to build a retirement budget that anticipates your sources of income and your spending needs. A financial advisor can help walk you through the planning process so you walk away confident in your retirement strategy.

This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at the website NextGen Wealth.