How Much Do I Need To Retire? #218
How much money do you need to save for retirement? $500,000? $2 million? The answer will never be the same. It’s specific to you. So how do you figure it out? In this episode of Retire with Ryan, I’ll share five steps you can follow to determine how much you need to retire.
You will want to hear this episode if you are interested in...
[1:25] Step #1: Calculate your budget for retirement
[4:11] Step #2: Calculate what you’ll receive from Social Security
[5:10] Step #3: Are you eligible for a pension?
[5:40] Step #4: Will you have any other income sources?
[6:27] Step #5: Look at your investments to see what you can withdraw
[9:28] Go through this exercise to determine exactly what you need
Step #1: Calculate your budget for retirement
The best way to figure this out is to create a budget based on what you think you’ll be spending in retirement. This usually falls into liability expenses (mortgage, car loan), fixed expenses (auto insurance, real estate taxes), and variable expenses (hobbies, travel, groceries).
Calculating the cost of health insurance can be tricky. If you retire early, you may look at an increase in insurance costs unless you qualify for affordable care subsidies. If you retire after 65, you’ll be enrolled in Medicare and want to research that cost.
Take a good look at what you’re currently spending and make any changes for what will look different in retirement.
Step #2: Calculate what you’ll receive from Social Security
Go to SSA.gov, create an account, and sign in to download your Social Security Statement. The amount you collect will vary depending on whether or not you wait until your full retirement age or beyond (and other factors). Let’s just say the base amount you’ll collect monthly is $2,000.
Step #3: Are you eligible for a pension?
What does that look like? Have you received a statement? Do you need to reach out to the company administering it? Can you generate an estimate of the pension amount? A pension that will pay you x amount per month will be factored into your final number.
Step #4: Will you have any other income sources?
Will you be working part-time during retirement? That’s one income source that you could factor in. Other sources could be:
Money from a trust or inheritance
Royalties
Money from rental properties
Step #5: Look at your investments to see what you can withdraw
How do you determine how much you can withdraw? You could withdraw a specific percentage from your portfolio every year. This is often referred to as the 5% withdrawal strategy.
The premise is that if you have your money invested in stock funds, and you’re withdrawing a certain percentage per year, the returns on what you still own should replace the withdrawal that you’re taking and adjust your income over time for increases in inflation.
If you’re comfortable with higher volatility, you could skew your portfolio toward stocks over bonds which may make it more likely for you to take out larger withdrawals.
Let’s say you’ve saved $500,000 for retirement. If you withdraw 4% a year, that’s $20,000 per year. 5% in $25,000 per year. If your expenses are $80,000 and you’re getting $50,000 a year from Social Security (between you and your spouse), you’d only need $30,000 of additional income per year.
If you can cover your expenses on that amount, you may be able to retire. There are certainly other variables at play, so we always recommend working with a financial advisor.
Resources Mentioned
Subscribe to the Retire with Ryan YouTube Channel
Get a FREE budget template on my website
Check out all of my episodes on Medicare