Retirement -- How Much Is Enough?

Taking to heart the request in this Pit thread for a discussion about how much is needed to retire and so on… Herewith follow some thoughts.

(1) The 80% of your pre-retirement INCOME figure is, frankly, bull. A more realistic number would be based off of your pre-retirement EXPENSES. Why? Because pre-retirement you have expenses that you won’t have during retirement – such as retirement savings, a mortgage (assuming you pay it off before retirement), and various work-related expenses.

Offsetting those decreases in expenses, to a greater or lesser degree, are health care costs, which we all assume will go up as we get older. But each person’s (or family’s) costs are going to be different, so the only realistic way to project this is to look at your own situation in detail.

(2) It’s generally recognized that you can only withdraw about 4-5% of your principal each year “safely.” (Safely, in this context, means without running out of money in 30 years.) See here for details.

Given that assumption, you’ll need to amass 20-25 times your annual expenses by the time you retire. So if your expenses are $20,000 per year, you’ll need $400,000 to $500,000 in your nest egg. (Do note, however, that you need to include taxes in your annual expense projections.)

(3) Where you live obviously has a major impact on how much you spend – as for a mortgage. Some people have sold (or are planning to sell) their home in an expensive part of the country and moved to a cheaper part of the country. This may or may not be a viable strategy at the time you’re planning to retire, depending on the vagaries of the housing market.

That also may not be attractive for some people; I, for one, have no desire to live in a rural area. I’m a city girl, through and through, though I don’t need a BIG city – just one with a decent college, high-speed internet access, and some cultural events. That said, there are lots of cities that meet those requirements that may have a lower cost of living than Las Vegas. It’s certainly something to look at as I get closer to retirement.

Basically, the upshot is that your own situation is unique. You have to look at your own numbers, not some one-size-fits-all rule of thumb.

Thanks for starting this.

And the health care system sucks, so you die before you have a chance to spend your money.

Where my ex will hunt me down like a dog? Not thanks. Mexico will have to do.

Excellent point. Let’s say I’m a simple guy with simple tastes and I just happen to be a very talented lawyer or surgeon. I may be earning $1,000,000 a year at the end. And let’s say my plan is to retire to the condo outside Ft. Lauderdale and just do volunteer work and hang out and join my friends for early bird specials. I might get by on 5% of my income and still have enough left over for generous Christmas gifts every year.

I think these journalists are in a bind. People are looking for these articles and they want formulas so the journalists and financial advisors make them up.

That’s a bad assumption and a bad idea. If you are conservative, then you can place that same cash in an Annuity. At age 65, a $500K annuity will gross you around $4000 a month- for life. You will never “run out”. Or you could invest it and live off the income, if you invest well. Withdrawing and spending your Capital is just plain silly.

There is also things like: Reverse Mortages, Pensions and Soc Security.

I agree that people overblow the situation, but is a 10% anuity really viable?

Here’s a question: Is it so necessary to retire? Personally, I enjoy my work and more importantly it’s a big part of my identity. I would like to work until I die.

Well, that’s you. And in fact, I am quite like that - my work can (and is) done perfectly well by older folks. Currently I sub-contract from two gentlemen who are both pushing 80. (I’m a Civil Engineer.)

OTOH you have folks like my hubby, who works in the trades (mechanic, currently head of the shop). He’s ready to stop working and do something else. He plans to retire next May (he won’t be quite 50 yrs old). Should he live to 90, he will need 40 years’ worth of income (plus inflation). We don’t live high on the hog, so to speak, but $45 k of salary times 40 years is 1.8 million (provided I didn’t push a key wrong on my calculator :stuck_out_tongue: )

kurilla is exactly right. Each situation is unique. We do plan to move to the country, grow a lot of our own veggies, etc. That’s our bag. Still, he needs some money in the bank or a good retirement plan to be able to survive.
(Luckily, his retirement is a guaranteed disbursement).

Planning for retirement is like a lot of things … if you fail to plan, you plan to fail.
(that’s paraphrased from some football coach, BTW)


Here is an awesome on line calculator.

You can put in the current principal of your retirement account, how much you’ll add each year, the growth rate (put in something somewhat conservative like 7%), how long you want to draw from it in retirement, and you retirement growth rate (put in something very conservative like 5%).

It will also calculate annuities, mortgages, etc.

Dr.Deth’s annuity seems a wee bit generous to me, but not off the charts, depending on your assumptions.

Wow, a question on the SD where knowledge learnt in my job may actually be useful! However, I can only really comment from a UK point of view.

This option (known as Income Drawdown) is becoming more and more popular over here. Annuity rates have been steadily dropping for the last ten years, so if you’re clever/lucky with your investments you can draw quite large amounts from your capital and make up for it with increases in the value of your stock. This also means your money can be passed on when you die, whereas with most annuities, if you die the day after purchasing them you get diddly squat for your £200k you put in.

Not in the UK, unless you’re at least 75 years old and/or have a serious medical condition. If you’re a female aged 50 you’ll struggle to get 5%.

ETA: In response to the last post, here’s one for the UK ((requires Java).

Hi! My first 403b statement comes with my paycheck today. I have $50 so far!

Would someone please be so kind to explain to me what an annuity is? How does that differ from a 401k or an IRA?

An annuity is something that you buy when you’re old.

You give me $500,000 and I promise to give you $20,000 (or whatever) a year until you die. I’m hoping that you die quickly.

How much I pay you is based on how old you are, how healthy you are, etc.

A 401K or an IRA is just a savings plan for you until you retire. It’s how you might build that $500,000 that you buy the annuity with.

One thing I recently read is that people overestimate the amount of money they will need in retirement, because they base it on their current income level. But there are a lot of things you are paying for that you won’t be paying for in retirement. For example, you won’t be contributing to a retirement fund (duh). I think (but I’m not sure) that you don’t have to contribute to social security. There are others, but I forget them.

401(k)'s, 403(b)'s and IRAs are types of invetsment accounts which reduce the amount of tax you’ll have to pay (in short). An annuity is something completely different: it’s a financial product where you pay an investment company a big chunk of money and they send you a monthly check, either for a fixed period of time or for the rest of your life. It’s a useful budgeting tool so you don’t blow your savings young, and can also ensure that you don’t live “too long” and run out of money.

(It can get more complicated than that, and there are other annuities which people use to accumulate savings, but life annuities like the one I described are relevant to this conversation).

edit: way, way beat by Trunk, with probably a better explanation

The only thing I don’t like about that calculator is it doesn’t factor in increase in income. My contribution to my retirement plan is a percentage of what I earn, and on my college’s income scheme, my salary increases 2.5% per year. So this calculator greatly underestimates my retirement income.

Thanks, Trunk and iwakura43, for your excellent explanations.

You may think my $50 is piddly, but I am 24 years old, and it marks the completion of my goal ‘‘to start saving for retirement by 25’’ – so I’m feeling pretty good about it! $100/month isn’t much, but it’s something at least.

ETA: Question – I know there’s a cap on what you can put annually into an IRA, but is there also a cap on what you can put into a 401k/403b? Is that cap split between the IRA and the 401k, or are they entirely different animals?

The max is around $15,000 for 401(k) contributions, so it probably don’t affect you. If your employer matches your contributions though, please please put at least that % of your salary in or you’re literally giving up free money. IRA contribution limits are separate, $4000 year this year IIRC.

A large part of this discussion also hinges on your goals and philosophy. The hubby and I are determined to retire earlier than the traditional age – and by “retire” we mean to be free to work when and where we want, or not, as we choose – and so many of these options are not necessarily good choices for us.

My mother has an annuity, and it works for her, though, so your point is well taken.

ETA a second thought that I forgot the first time around: The 4-5% withdrawal assumes you’ll have an investment return of 8-10% before taxes, so you are withdrawing partly interest income and partly principal.

Other people underestimate the amount that they’ll need in retirement. It can be really easy when you are 25 years old to think you’ll have your house paid off when you retire - only to upgrade in your prime earning years at 40, cash out a little value at 50 for a trip to Europe for a wedding anniversary trip, have medical bills at 60 that require taking out a second mortgage, and facing retirement with that mortgage still there - and being unable to downsize because your daughter and grandchild just moved back in with you when her husband lit out.

Less drastically, a lot of people discover that when they aren’t working, that gives them a lot of time to spend money. Retirement hobbies for your first few years can be fairly expensive - even planting a beautiful garden can set you back hundreds in annuals. Golf, travel, woodworking - it all takes money. There are grandchildren to visit and spoil.

While I’m no fan of rice and beans in order to have a luxurious retirement, if you can live comfortably and save a little more than you think you’ll need, the worse that happens is that you’ll have to leave it behind to your kids or a worthy cause. Its better to be able to choose to be frugal than need to be frugal at any stage.