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How much money do I need to have to retire on?

How much money do I need to have to retire on?

June 15, 2023

The answer for many people is more than you think.

There are many studies available showing that the majority of Americans have savings rates that are way too low to support their retirement needs.   Some show that many people could not afford an emergency expense of less than $1,000 and be able to pay it in cash.

So how much savings and income will you need when you retire?  In my opinion it depends on three things.

  1. What is your expected spending rate when paychecks stop?
  2. How much do you have saved or in resources when your paychecks stop?
  3. Are the resources you will have access to pretax or after tax money?

What is your expected spending rate after retirement?  Will your mortgage be paid off?  If you refinanced in the last few years to take advantage of lower interest rates that’s good, however have you planned for when that mortgage will be paid off especially if its past your planned retirement date?

What about new special expenses such as traveling, kid’s college or maybe medical insurance since you won’t be covered by a company plan?

Various studies show that its common that many people need anywhere from 60% to 80% of their pre-retirement income for after retirement expenses.

Have you done a financial forecast using your current spending needs with estimates into the reasonable future, especially looking at the cross over between income dropping due to retirement and continuing expenses?

A recent article I sent out discussed the passing of a spouse.  With that passing at least 50% of the retirement income went away due to their choice at retirement to choose what was probably the highest monthly income.

However, when that person passed away all their future retirement income stopped leaving the surviving spouse with a massive shortfall in monthly income, but large expenses such as the mortgage did not decrease.

Has your financial forecast estimated what would happen if one or the other spouse passed away first and will the surviving spouse have enough income to have a reasonably comfortable lifestyle?

How much do you have saved or have as resources when you retire?  Social security is a resource, its there waiting for you. 

Not in any account you can access like an IRA, but do you know how much you might get?  Have you set up your account at this site and checked that your past years of employment income have actually been reported for you?

If you have a traditional pension plan that’s a resource, do you know how much to expect to receive when you retire?

Otherwise most likely your resources are your IRAs and 401K type plans.  How are those tracking?  Are you participating in those plans, at least up to the amount of any company match?  Does your company even have a plan to participate in?

If you are self-employed or have a profitable side gig, have you set up your own retirement account to set aside money into?

Are your resources, Social Security, pension plan, IRAs and 401K type plans in pretax or after-tax accounts?  If they are in pretax accounts you most likely will be paying tax on that income when drawn during that future year.  

Many people think that Social Security income is not taxed but that’s often not true.  Depending on the amount of other income on your tax return, it may not be taxed, or as much as 85% of it might be taxed at whatever the tax rate is on your tax return for that year.

A traditional pension plan is almost always taxed when you receive payments. 

Your own IRAs and 401K type plans may or may not be taxed when you draw on them during retirement.  Are they in Roth accounts or traditional accounts?

If traditional, then when the income is drawn during your retirement years that income will be taxable.

To put that in perspective, if you have $1 million in pretax retirement funds, that’s great to have accumulated that much, but make sure to remember that some portion of that will be taxed and not available for your use.

If you answered no to many of the questions above perhaps we should set up a call to discuss how to address your questions using one of the links below.

The information in this and other articles is intended to be educational in nature only.  Not tax, legal or investment guidance for you specifically.  Each person’s situation is unique and you must seek appropriate professional guidance that can address your unique situation.