A million dollars isn’t the symbol of wealth it once was, but saving that much for retirement is still rare.
Only 16% of retirees say they have more than $1 million saved, including all savings and personal assets, according to the latest CNBC Your Money retirement survey conducted with SurveyMonkey.
In fact, among those currently saving for retirement, 57% say the amount they hope to save is less than $1 million. It’s unclear whether those people are being realistic about their ability to save, or whether they think they’ll be able to get by on less.
To be fair, it’s not easy to think of your retirement being funded by a large dollar amount.
When planning for clients’ retirement, financial planners usually recommend working in the opposite direction. First think about how much annual income you will need to finance the lifestyle you want when you are no longer working. Then, after factoring in other sources of income, such as Social Security or a pension, you can determine how much you can safely withdraw from your portfolio to cover the difference.
And “safe” is the key word. If you withdraw money from your portfolio too quickly, you drastically reduce the chances that the money will last for your entire retirement. As a classic rule of thumb, you can withdraw 4% of your portfolio’s value in the first year and keep taking that amount, adjusted for inflation, thereafter.
Say you want to pay yourself $100,000 a year from your portfolio in retirement. Divide that figure by 4%, and you arrive at the amount you’ll need to retire: $2.5 million. If you plan to retire with $1 million, by the same calculation you can expect to withdraw $40,000 in your first year.
How much will you spend in retirement?
How much retirement income you’ll actually need depends on a number of factors, including your lifestyle, life expectancy and the amount of medical care you’ll need.
“There’s kind of a general guideline that about 80% of what you spend today is what you’ll probably spend in retirement,” says Jamie Bosse, a certified financial planner and senior advisor at CGN Advisors in Manhattan, Kansas. “But we find that it changes during the retirement years. That first decade is more expensive because people are checking things off their bucket list.”
The logic of Bosse and other advisers is based on the idea that some large, fixed expenses are out of reach for many retirees. After all, whatever percentage you previously put into savings accounts can now be safely spent. Some other expenses—like putting the kids through college or paying off a mortgage—may also disappear by the time you retire.
But some planners say it would be wise to assume a status quo when it comes to your spending. “The school I subscribe to is that you will maintain the same standard of living,” says Gerika Espinosa, a CFP with a DMBA in Salt Lake City, Utah. “You can switch your mortgage payment to a medical premium payment.”
Plus, she says, you’re unlikely to be pinching pennies instead of going on more trips or visiting the grandkids. “In my experience, it’s very, very difficult for people to have a reduced standard of living.”
If you’re planning to maintain your standard of living in retirement — or even lower it a bit — think about what you’ll need to save to make it happen.
Remember, the US government will theoretically help. Assuming you claim Social Security at full retirement age — 67 for those born after 1960 — your benefit is designed to replace about 40% of your annual pre-retirement income. Wait until age 70 and Uncle Sam will increase your benefit by 8% per year.
However, with private pensions all but gone, you’ll have to rely on withdrawals from your savings to cover the rest. With that in mind, depending on your income, putting away $1 million or more by the time you retire may seem less like a lofty goal and more like a necessity.
“Now more than ever, your future financial independence is directly related to your ability to save a portion of your income now for retirement,” says Bosse. For young people thinking about these questions, she says, “it’s about how we can balance living well today with saving and planning for the future.”
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