How much do I need to retire?

It's one of the most common questions people have. What each person needs will vary widely based on several different factors including: your current age, age at retirement, health, changes in income pre-retirement, spending expectations in retirement, etc. There are so many variables, even as financial advisors, we run highly complex software to explore multiple scenarios to find a range of outcomes that provide confidence to our clients.

For those not looking for a deep dive into the question there are a few quick strategies that can provide some guidance about how much you may need to save for retirement. These will be helpful in getting a rough idea but running a true retirement plan is the best way to ultimately give you a firm grasp of your personal retirement.

Savings Benchmark Multiple

One strategy is the accumulated investment savings multiple or the savings benchmark approach. This is a simple strategy and works well when you are earlier in the journey. The plan of action provides savings goals based on age to ultimately replace a portion of your income in retirement. The guideline: Aim to save at least 1x your salary by age 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67. Your personal savings goal may be different based on various factors including tax strategies, and how you want to live in retirement, but they can serve as goalposts along the way to help you plan to save enough to maintain your lifestyle.

An Example: The Final Multiple: 10 times your annual income at retirement age. If you plan to retire at 67, for instance, and your income is $150,000 per year, then you should have $1.5 million or more set aside for retirement.

A second strategy is known as the 4% Rule.

What is the 4% Rule?

The 4% Rule is a practical rule of thumb that may be used by retirees to decide how much they should withdraw from their retirement funds each year.

The 4% rule is easy to follow. In the first year of retirement, you can withdraw up to 4% of your portfolio’s value. For example, if you have $1 million saved for retirement, your goal would be to spend $40,000 in the first year of retirement.

Beginning in year two of retirement, you adjust this amount by the rate of inflation. If inflation were 3% you could withdraw $41,200 ($40,000 x 1.03). One common misconception is that the 4% rule imposes a withdrawal of 4% of the portfolio value each year during retirement. The 4% applies only in year one of retirement.

A practical example of how the 4% rules works:

Let’s assume that an individual entering in retirement is making 100,000 a year in income and wants to have an income of 70% of this amount or 70,000 in retirement. (This is a good rule of thumb as general expenses, taxes, and employer benefits are reduced in retirement). Considering the 4% rule, you would need a starting balance of $1,750,000 in retirement savings to accommodate a 70,000 starting income stream.

Both strategies can be beneficial rules of thumb to give you a generic guideline. However, working with an advisor to show you all the complexities of your personal situation, as well as how portfolio risk, sequence of returns, interest rates, and much more impact these general concepts, ultimately might be worthwhile.

No matter where you are in the journey, don't get discouraged if you aren't at your target. There are usually ways to catch up to future milestones through planning, saving, and a proper investment strategy. The key is to take action, and the earlier the better. If you are interested in working with us to find out more about where you are in the process, please contact us at Farris Capital Managment, Inc.