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How much should I save for retirement?

January 27, 2023

I get this question a lot.   Like many questions the first answer is - it depends.

Big questions like will your mortgage be paid off, do you plan to take lots of expensive trips and eat in the finest restaurants, will you be paying for someone’s college education, will you be paying for excessive health care expenses for yourself or those you care for will all be part of that answer of how much do you need.

A common ratio is that you should plan to need at least 60 to 80% of your working income level in retirement income.  Some expenses should decrease such as commuting expenses and possible more expensive workplace clothes.  However that could easily be replaced by more transportation costs as you now can drive more than just to and from work, more green fees for all the extra time to go golfing or perhaps more hobby expenses now that you have time to pursue hobbies. 

The point being that just because you aren’t working full time, your expenses may be just as high as they were during your working years even if the mix of expenses changes so planning for retirement income needs should be done well in advance of your planned retirement date.

Working with a combined tax and financial planner could come in very handy at this point.   Lets say you have a million dollars accumulated in your retirement accounts and you’ve reached the point of retirement and ready to kick back and relax.

But do you really have a million dollars sitting there just waiting for you to use? 

If its in pretax accounts, then most likely not.  Depending on how fast you draw down that money and the rest of other income and deductions on your tax return, after tax you might only have $500,000 left after tax. 

That’s a pretty big difference and not something you want to find out late in life when its too late to go back out and earn some additional money from a side job.

Financial planning might have gotten you to that million dollar retirement fund, but tax planning will largely decide how much of that you actually get to use.  Does it make sense that both should be considered together years before you decide to retire?

So the answer to how much you need to have saved depends on how much you need in retirement and even what type of account it is sitting in.

Like many journeys you wouldn't go on a trip without planning and your personal financial health is a journey too and so you should have a plan.   We cannot predict the future, but if you don’t have a destination in mind, any road will take you there and it may be too late when you find out that destination you are approaching isn’t where you wanted to go. 

The question is what's your destination? If you haven’t decided that yet and would like someone to talk to about it lets set up a call using the link 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.

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