How Much Money Do I Need to Retire?
Hi, I’m David Witter, founder, and CEO of Financial Harvest Wealth Advisors. I’m going to address the question: how much money do I need to retire?
I have five steps that you can go through to determine the answer, but before I dive into those, I wanted to start with two precursors:
The first thing you should know is that if you’ve never sat down and worked through the calculation or the math to see how much money you need to retire, there might be some sticker shock.
I know there was for Katie and me when we first did it. But, it’s okay, stay centered. Knowing the number and working toward that is a much better outcome, versus not knowing it at all.
Not Everyone Is Ready
The second thing that I would share is even though I’m here walking you through these steps, that doesn’t mean that Katie and I hit our number yet. We’re right there on the front lines with you — aggressively saving toward retirement so that we have enough money to be able to retire.
First of Five Steps: What Are You Spending Today?
So let’s go into the five steps. First, is that you’ve got to know what are you spending today? Because if you have a lifestyle that you’re used to, you probably want to keep that same lifestyle when you retire.
Spend More Money In Retirement
In fact, we find a lot of our clients, when they retire, they actually spend a little bit more money. Because instead of having a two-day weekend, they have a seven-day weekend. So, the first thing is to start with how much you’re spending today to live the way that you do.
Second: Adjust and Allow for Inflation
The second step is depending on how long you have until retirement, you need to inflate out though that money that you need to live on. So if today you’re spending, $100,000 to live the way that you do, in 15 years, you’ll need closer to $150,000 to be able to live the same way that you do today.
So you’ll just need more money coming in because things cost more. Property tax, health insurance, food, vacations, it all costs a little bit more. So that’s the second step…figuring out how many years till you retire and then inflating that out to how much you’ll need then when you actually do retire.
Third: Allow for Taxes
Step number three is you’re actually going to be spending $100,000 in our example, we need to gross up the number to $150,000 that you’re going to spend in order to account for your taxes. But remember, when you’re in retirement, social security, pensions, and then withdrawals from your 401k, your retirement accounts, they typically are taxable income. You have to allow for taxes.
So just to make it easy, let’s say maybe it’s going to be a 25% tax rate, then you’ll need $200,000 of pretax income in retirement to generate the $150,000 that you need so that you could have the same lifestyle that you’re utilizing at $100,000 today.
Fourth: Include Pensions, Social Security Funds
So, now when we have that pretax number of $200,000 step number four is hopefully that you’ll be getting some help from a pension or from social security. So let’s say that you look up those benefits and you say, “Okay, I think I can safely anticipate that I’m going to get $50,000,” let’s say from social security or pension, then you need $200,00 subtract the $50,000 from the $200,000. That means you need $150,000 pretax from your savings and investments.
Fifth: Determine a Safe Withdrawal Rate from Savings and Investments
And the last step, step number five is that once you know the annual income need from your retirement savings — in our example, it’s $150,000 — well, the safe withdrawal rate out of your savings and investments is a 4% safe withdrawal rate.
I can talk you through why that’s the case, but working off of that 4% number, if we need $150,00 then it’s the same as doing the inverse of 4% or multiplying by 25.
Money Needed to Retire: $3.75 Million (For Example)
But if we need that $150,000 of pretax income to go along with our social security or pension of $50,000 that $150,000, if the safe withdrawal rate is 4%, that means our savings and investment bucket for retirement needs to be $3.75 million.
Big Number, But Investments and Savings Contribute
You might be thinking, “Gosh, that’s a big number.” But remember, if you’re 15 years away from retirement, you’re going to get growth from your existing savings and investments, and hopefully, you’re contributing right along the way.
The Fives Steps Toward Knowing When You Can Retire
So those are the five steps to knowing when you can retire. If you figure out, all right, how much money will I need to be able to retire? And in our example, we stepped it through. We came to $3.75 million.
If you need any help calculating for yourself, we’re happy to step you through it. Again, I’m David Witter, founder and CEO of Financial Harvest Wealth Advisors.