I’m sick of the clickbait articles with this headline. They only consider some of the different things you need to factor in when answering how much you need for retirement.
Ok, I shouldn’t say “never,” but so many that I come across don’t. They get you to the page, provide surface-level info, and leave you searching for more.
They cover the same basic ideas without putting each one into perspective. The philosophies they cover are great, but there’s more to breaking it down to find out what you really need for retirement.
All the articles I read with the “How much do you need for retirement” heading state the same things:
- Americans now expect they will need 1.25 million to retire comfortably
- Divide your desired annual income by 4%, and you’ll have your retirement number
- The amount that you should have saved for retirement at each age
- Retirement income should be about 80% of your final pre-retirement earnings
- Follow the 4% rule
- Base your retirement savings on what you expect to spend
- 10-12 times your annual income at retirement age
It’s a great list, and all good things to consider. But let’s break it down a little further.
Americans now expect they will need 1.25 million to retire comfortably
Are we talking about Americans in Washington, DC, or are we talking about Americans in Idaho? Because there’s a huge difference!
We must consider more than just wrapping the entire country into one ball to discuss retirement goals. That’s the most ridiculous idea ever.
The average household income for Mclean, Virginia, is $222,000. The average household income for Boise, Idaho, is $87,000.
That’s a big difference. Do the two groups have
different retirement goals? Do they have different retirement savings at different age markers? Probably.
That same article doesn’t go into the details of retirement at all. It doesn’t talk about current lifestyle, expected lifestyle in retirement, where you’ll live in retirement, hobbies, pensions, social security, or anything else you want to factor into the equation.
It only covers inflation and how 1 million dollars isn’t what it used to be. No kidding! And we can’t go to the movies for a nickel anymore either.
Where’s the value in that article? What does that do for me as someone looking to actively plan for retirement?
Divide your desired annual income by 4%, and you'll have your retirement number.
Magic! That’s all you have to do.
How am I supposed to come up with my desired annual income? Do we have a crystal ball where we can see into the future? What is 100k going to look like in 30 years?
Do I know what my life will look like in 20-30 years? Will I be healthy? How much will healthcare cost?
Where will I be living? Will I be active? Will I travel? Will I have expensive hobbies?
What will my housing expenses be? Will I have a house that needs repairs and general maintenance? Will I live in a high-rise with high condo fees? Will I live in an assisted living community?
Will I need long-term care? How long will I need it? Will my spouse and I both need it?
Are my spouse and I still going to be married? Is one or both of us just waiting for the kids to graduate before we split?
What if one or all of our kids need financial help? Are we going to help them? How much do we help them?
The amount that you should have saved for retirement at each age
Come on with this one. All the above apply to this one. But there’s also so much more that plays into it.
Everyone hits their career stride at different ages. You have doctors in school and debt for years until they see massive income growth.
Business owners struggle to get to where their income matches their work input. The prime earning years are your 40s and 50s, but your best time to invest is in your 20s.
All these articles are doing is stressing people out.
Retirement income should be about 80% of your final pre-retirement earnings.
This is great for those grinding it out until their final retirement day. However, what about those who have invested well early and are dialing back their careers? This calculation needs to be clarified for them.
What about the highly successful people who had successful years pre-retirement? Double, triple, or more what they earned before that. This calculation needs to be clarified for them too.
Follow the 4% rule
You read different articles on the 4% rule all the time.
“It doesn’t work anymore because of inflation.”
“It’s not 4% anymore. It’s 3%.”
“You can’t follow the 4% rule because what happens when the markets are down?”
The fact is, the 3-4% rule can work if it’s used correctly. You can take more out when the market is up; when it’s down, you take less. If you want to be more conservative, assume 3% instead of 4%.
However, the 4% isn’t a hard and fast rule. It depends on what your investment portfolio looks like.
Do you own rental properties? Do you have a pension? How much will your social security be?
Base your retirement savings on what you expect to spend.
What do I expect to spend? In 20 years?! No freaking clue. I don’t know what my life will look like in 20 years.
I also don’t know what everything will cost in 20 years. Inflation is crazy right now. How long will that last?
10-12 times your annual income at retirement age
This is a repeat of “Retirement income should be about 80% of your final pre-retirement earnings.”
How to Plan for How Much You’ll Need for Retirement
Let’s start with the idea that many retirement articles use averages. I don’t want to be average. I don’t want to live like the majority of Americans do.
Sorry, that’s not what I hope and dream for.
I want to live my life by design. Now and when I retire.
I don’t want to make sacrifices in retirement. I don’t want to hold back on LIVING, and I definitely don’t want to take a step down from how I live today.
However, I don’t want to limit my current life to have a great retirement. Which is a tricky balance.
It’s a constant struggle for me to put earned income into retirement investments or live life now. I know it’s a struggle for you also, which is why this blog exists.
I will not give you all the answers and design your plan. I can’t do that within an article. Everyone has different goals, lives different lives, and a different vision of what retirement will look like.
My goal is to give you everything to consider while putting your plan together. Because there’s no magic number to have saved for retirement.
Putting Together the Plan
The plan will consist of three pieces. When do you want to retire, what do you want your retirement to look like, and how will you fund your retirement?
None of these is more important than the others. They all are essential, and all play off of each other.
We’ll start with when you want to retire and what you want retirement to look like. The two are so closely related that we’ll cover them together.
When Do You Want to Retire and What Will Retirement Look Like?
There is no right or wrong answer here. Everyone wants something different. It’s up to you in which direction you go.
Some people are all about the F.I.R.E. movement and want to retire in their 20s. Some want to be financially free in their 20s but keep working on things they’re passionate about. Some people want to be financially free but keep working into their later years.
Everyone’s goals are different. You have to figure out what it is that you want.
Here are a few things to consider as you figure this out:
This entire process will take some work and reworking to get to where you need to be. It’s also a living document that will change over time.
Start with the questions below. Document everything from here moving forward so you can easily modify your plan if needed.
Do You Enjoy Your Current Career?
If you enjoy your current career, you can continue working in it in some capacity. You can either continue full-time because that’s what you love and you want to stay busy, or you can go part-time.
As you consider how or if you’ll work, understand that your aspirations to have an active income may change as you age. Your desire to work may change, and your health may also impact your ability to work.
You may become bored or lonely without working. Which would put you back in the workforce in some capacity.
When You Retire, What Will You Do?
The transition from working full-time to retirement is a massive shift. How do you plan on filling your time?
Do you have hobbies now? If so, how expensive are they to maintain? Building model cars is a lot more cost-effective than collecting antique cars.
Are you going to travel to fill your time? If so, that can add up.
Having no hobbies or plans to fill your time could become highly dull. That could be your thing. If not, you’ll want to consider how you will spend your time.
Do You Have or Want to Have Children?
How old are your children? Does it make sense to retire while they’re still in school? Is your goal to spend more time with them in the 18 Years You Have with Them?
Do you want to keep your family home for them to come back to over the holidays? Will they need a place to live after college while they get on their feet?
What happens if they fall flat in later years and need a place to live? Are you going to have space for them to live with you? Space for their families to live with you?
Do you plan on leaving them wealth such as a business, real estate, or other assets at your death?
Do You Have a Budget in Place Now?
Are you currently working off of a budget? If not, start this practice.
You’re making plenty of money now, but it will be necessary once you’re on a fixed income. Also, the budget is needed to properly plan for retirement to measure and hit your goals.
You may need to adjust your goals based on your current income or desired retirement. Adjust your plans or change your actions. Something needs to happen. You’ll need the budget to figure this out.
Do You Have a Bucket List?
I don’t know about you, but I have a decent-sized bucket list. My goal is to check the boxes on as many as possible. Not just to do it and say I did it but really enjoy it.
I want to LIVE in retirement. I don’t want to be stuck sitting at home because of the budget that I’m working with. The freedom to do what I want is important. What do you want to do?
What Kind of Lifestyle Are You Accustomed to Now?
If I want to go out to dinner, I like to have that option available.
When I want to travel somewhere, I need to be able to make that happen.
I don’t enjoy being limited by financial shackles. I don’t live that way now, so why would I want to live that way in retirement?
The benefit of retiring is that you’re no longer saving for retirement. So you assume that you’ll need less income monthly.
However, maybe not. You may plan on traveling endlessly in retirement. That’s part of this exercise. You have to decide what YOU want.
Where Will You Want to Live in Retirement?
Where you end up living in retirement is a huge factor in your monthly expenses. If you live in Northern Virginia, your housing expenses will be high.
If you live in Florida, your housing expenses will likely be lower. Along with a lot of other regular costs.
Do you want to be a snowbird? Live in the North in the summer and the South during the winter?
Are you going to live in a house, townhouse, or condo?
Figure out where you want to be and what you want, and start making the calculations. Look at properties in that area on Zillow.
Start a spreadsheet where you can run the numbers of what it may cost for that property at your retirement age. You can use http://www.city-data.com to figure out what the average appreciation for properties in that area has been for the last twenty years.
Plug those numbers into your spreadsheet so you can account for this expense. Making sure you’re taking inflation into account. Consider buying that property now and renting it out.
Put together the numbers
Sorry to say this but you’re going to have to put together a budget for this. You have to figure out what your current expenses are and then decide what they may look like in retirement.
Below is a straightforward budget example:
Put together your budget and see where you are right now. Once you have that together, you’ll have to go in and calculate what you think the numbers might look like in retirement.
The average yearly inflation in the US has been 3.8% from 1960-2021. Account for this in your future budgets.
But you can’t stop there. Those expenses aren’t fixed. You could be in retirement for twenty, thirty or more years.
Make one of those retirement budgets for every five years in retirement. It’s work, but you need to do it to get a proper grip on what you’ll need for income.
Once you have those numbers, you can work backwards to see where you need to be with retirement savings at every stage between now and then. Now, let’s figure out how you will hit those numbers.
How Will Your Retirement Be Funded?
Now you know what retirement will look like and how much you’ll need, but how will you fund it? There are several different investment vehicles at your disposal.
Personal finance is personal, so choose the best fit for you. I have the ones that I like the best. However, I use a combination of almost all that is noted.
It really depends on what your goals are.
Real Estate
Real estate is one of my favorite investment vehicles for a retirement portfolio. You can get steady cash flow, great return on investment, tax advantages, it’s somewhat passive, it’s protection against inflation, and you can utilize leverage for exponential growth.
Steady Cash Flow – You can set up your real estate rental portfolio in a way that it provides cash flow every month. With the proper planning, you may be able to build a rental portfolio large enough to live solely off of the cash flow.
Great Return on Investment – You can benefit in several ways through real estate. Cash flow, appreciation, mortgage paydown and tax advantages.
As previously mentioned, you can set up your portfolio to live solely off of your cash flow. You could use a waterfall method to pay off properties faster and increase your monthly cash flow.
You can use the appreciation from the properties as a wealth builder. As the properties appreciate, so does your equity and net worth.
Your tenants are paying your mortgage. The longer you own the property, the more they pay down on that loan.
There are a number of tax advantages with owning rental properties. A few are; the expenses are deductible, mortgage insurance is deductible, you have depreciation deduction, and you can defer capital gains.
Passive Investment – Many people will say this is a passive investment, but I don’t necessarily agree. Even when you have a property manager, you need to monitor the property manager and keep everything in check.
Either way, it’s little work to have in your retirement while still earning an income.
Protection Against Inflation – When the cost of goods and services go up, so do real estate values. As prices rise, so does your income from your rental properties.
Utilize Leverage for Exponential Growth – If you buy a 500k property as an investment, you’re putting down 25% ($125,000). There are actually ways that you can put down as little as $17,500 for the same investment property.
Let’s assume you’re earning 5% appreciation on that property. That’s not 5% growth on your $125,000 that you invested. That’s a 5% growth on the 500k value of the property. A return of $25,000 (20%) on a $125,000 investment.
For all of these reasons individually and together, real estate can be a great piece of your retirement portfolio.
401k or 403b
These are both employer-sponsored retirement plans. There are downsides or complaints that people have with these plans, such as:
High fees, limited investment opportunities within the plan, difficulty accessing funds early if needed, expenses with early withdrawal, and minimum distributions at a certain age.
However, they are a good fit for most people’s investment portfolios. Not the sole investment but a piece of the puzzle.
It’s a set-it-and-forget-it type of investment that is generally easier to handle. The money is taken out of your paycheck and it’s like you never earned it. You don’t have the chance to spend it elsewhere.
There are limits to what you can contribute, which generally change yearly. If you’re over 50, there are higher catch-up limits.
SEP IRA or Solo 401k
A Simplified Employee Pension is a similar concept to the 401k plan mentioned above. It gives employers a method to contribute to employee’s retirement as well as themselves. However, the contribution limits can be higher.
The Solo 401k is similar to the SEP IRA but is meant for a company with solely the employer. Depending on the company payroll structure, you can also commit more to the plan than with a SEP IRA.
There are limits to what you can contribute and those limits generally change yearly. If you’re over 50, there are higher catch-up limits.
IRA
This Individual Retirement Account can be opened by anyone and the money is subject to income tax when withdrawn in retirement.
There are limits to what you can contribute and those limits generally change yearly. If you’re over 50, there are higher catch-up limits.
Roth IRA
The Roth Individual Retirement Account is another one of my favorite retirement investing vehicles. The beauty of this approach is that you’re contributing after-tax money.
It’s not tax-deductible, but you’re withdrawing the money tax-free after you turn 59-1/2 years old. As long as it’s been five years from your Roth contribution. Technically, you can withdraw any money you’ve contributed before 59-1/2 without penalty.
There are income limits on if and what you can contribute to this account. If you make a certain amount, you may not have this option.
However, if you make too much, the trick is that you still can make a Backdoor Roth contribution. This is where you contribute to your Traditional IRA and then roll it into your Roth.
There are no required minimum distributions that you need to take at a certain age.
I also like this plan because I plan on making a lot of money in retirement. Which means I will be paying a lot of taxes. I believe taxes will be hirer when I’m in my retirement years. This tax-free income in retirement will be very beneficial.
There are limits to what you can contribute and those limits generally change yearly. If you’re over 50, there are higher catch-up limits.
Brokerage Account
You can use this account to purchase stocks, bonds, ETFs, mutual funds and other investments. It’s easy to open an account online, and many options exist. Fidelity, Etrade, Vanguard, Charles Schwab, etc.
There’s no limit to the amount of money that you can have in a taxable brokerage account.
Real Estate Syndications
It’s no secret that I love real estate investments. Syndications are when you bring a group of people together and pool their money to purchase properties.
You have the general partners who handle the day-to-day operations of the investment. Ideally, this group is skilled in what you’re investing in and has a track record of successful acquisitions.
Then you have limited partners. This group is made up of passive investors.
You need to be an accredited investor to participate in syndications. As a group, you share in the profits or losses that the investment brings.
This is an incredible way to invest in real estate in a truly passive way. Before investing, do your due diligence on all aspects of the syndication.
HSAs
A health savings account is a tax-advantaged investment vehicle. It’s used to pay current medical expenses or save for future medical expenses.
It’s no secret that health expenses are increasing. As you age, it becomes more of a concern. Especially in retirement when you generally don’t have a company sponsored health insurance.
HSAs are a great way to plan for health expenses in retirement. Look at your options, run the numbers and choose accordingly.
There are limits to what you can contribute, which generally change yearly. If you’re over 55, there are higher catch-up limits.
Pension
A pension plan is an employee benefit where the company contributes regular payments to a pool of money. That money is set aside and invested with the goal of funding payments to the employee after their retirement.
The traditional pension plan has become increasingly rare. It’s primarily been replaced by the 401k plan, which is significantly less expensive for the employer.
Social Security
The Social Security benefit was put into place to replace part of your income once you retire. You can start collecting at age 62.
The longer you hold off from collecting, the larger your monthly payments will be.
The Social Security benefit has changed over the years but was created to provide economic security to aging and disabled Americans. It was never meant to be your sole source of retirement income.
As of the most recent report dated February 2022, the benefits paid out are greater than the amount paid into the program. Which means, unless they make some changes, this benefit won’t be around forever. At least at full payment.
I suggest not looking at this as a retirement plan. If it’s available when you retire, it’s an added bonus.
Create a Retirement Income Spreadsheet
This is a simple spreadsheet that includes the following:
- Age
- Amount of Months
- Monthly Return Rate
- Monthly Investment
- Account Value
The formula that you’ll use is:
=FV($E$15,C3,$E$16,$E$18)*1
=FV(Monthly Return Rate, Amount of Months, Monthly Investment(Needs to be negative), Starting Amount(Needs to be negative))*1
I use a 5% return on my spreadsheets for IRAs, Roth IRAs, 401k, SEP IRA, ETFs, and 529’s. You can use whatever number you want based on your investment and what returns you expect.
Enter all of your investments into this form. Then assume that you’ll withdraw 3 or 4% in retirement at different ages.
If you have real estate income and/or pensions, add their income to the previous number. Now you can see what monthly income you’ll have at each age based on your portfolio today and the investments that you’ll make.
How do these numbers look against the budget spreadsheets that you created? Do you have enough at each age to cover your expected expenses?
Additional Retirement Considerations:
Below are items that often need to be accounted for, and you’ll want to include them in your calculations.
How Much Will It Cost for Healthcare?
This is something that you really need to pay close attention to when making your calculations. It’s probably something you overlook now because it’s paid for by your employer.
However, once you retire, that’s all on you.
It’s estimated that a couple retiring today, at age 65, will need approximately $260,000 to cover health care costs in retirement. There are healthcare calculators that can help you determine what you’ll need during retirement. Below are two examples.
Calculators:
Long Term Care
I’ve seen this play out firsthand with my family. I’ve had multiple older family members that have needed different levels of assisted living.
Trust me when I say that state-run facilities are not pretty, they’re not private, and you don’t want to spend the last years of your life there. Or any year, really. Private facilities are expensive and can range from expensive to extremely expensive.
On average, a semi-private room in a skilled nursing home costs more than $80,000 per year today. A private room is over $90,000.
I ran the calculation for a private room in a nursing home in Virginia in 2051, and it shows $1,152.67 per day. That’s $34,580 per month! Assisted living is over $17,000 per month.
That’s based on a 4% inflation. Use the calculator below to run your own calculations.
How Will Inflation Impact My Retirement?
I mentioned it already, but I want to be clear that you have to account for inflation when you run your numbers. If not, your calculations will be incorrect, and unfortunately, you’ll be short.
The average inflation rate in the US from 1960-2021 was 3.8%. When you run your future budget numbers, add a column that adjusts for inflation. We can’t predict what they’ll be but using 4% is better than not accounting for it.
Feel free to be conservative and use a higher inflation rate.
Stock Market Volatility
This is where the 4% rule comes into play. If you’re withdrawing 4% of your retirement every year, regardless of what’s happening in the market, that could be a problem.
Sure, taking 4% withdraws on your portfolio when we’re in a Bull Market and it’s up 15% will be fine. However, taking 4% when we’re in a Bear market that’s down 20% might not work out well.
For this reason, your portfolio should be diversified. Diversification will vary depending on your net worth, risk tolerance, retirement required retirement income, and overall goals.
Nothing Ever Works Out as Planned
“Everyone has a plan until they get punched in the mouth.” Mike Tyson
You’re creating a plan. You’re predicting the future, not guaranteeing it.
That’s why I like to be conservative. I follow the mantra, “hope for the best, plan for the worst.” If everything goes according to plan or better, great. If not, I want to make sure I’m still covered.
For me, I want to work forever but I don’t want to have to work. I want to be financially free as soon as possible.
Even when I become financially free, I will continue to invest in and work in real estate on a schedule that fits my desired lifestyle. Not only do I enjoy real estate but I want to stay busy.
I also want to use my knowledge and skill set to build generational wealth. I don’t want to just hand them a fortune but I like the idea of educating them about the process and growing something with them. That’s the goal anyway.
In the book Die with Zero, Bill Perkins talks about managing your money so it’s used entirely during your lifetime.
The idea of saving enough money to live and using it all by the end of my life is crazy. It’s too much of a gamble with too many things that can go wrong. I don’t want to outlive my investments and be left stranded…eating cat food.
The plan that I’m much more comfortable with is creating an investment portfolio that will pay forever. A portfolio that pays me more than my wife and I need to live the life we’ve designed. At my time of passing, that portfolio will hopefully do the same for my kids, who have helped build and maintain it.
This is the longhand version of figuring out retirement. It’s more complicated than online calculators but more accurate and keeps you in touch with your finances.
Create the plan that works for you. Create and live your life.
Get out there and be somebody.
