One of the most common questions that people have when planning for retirement is “How much do I need to retire?”. There was a recent study by Northwestern Mutual that shows people believe they need $1,250,000 to retire comfortably. Is this number accurate? In this video, you will learn exactly what retirement looks like if you have that much in savings as well as 3 “Retirement Numbers” you will want to know when you are planning for retirement. We will also explore how far $1,250,000 get you in retirement. Can you retire comfortably with over a million dollars?
In this video, we're going to take a look at how much you actually need to retire comfortably. We'll help you calculate your retirement savings, and discuss some other factors you need to consider if you're planning on retiring soon.
This video is a crucial step in planning your retirement - so make sure to watch it and learn everything you need to know to reach your retirement dreams
https://news.northwesternmutual.com/planning-and-progress-study-2022
Read The Transcript
If you are saving for retirement, you’ve probably wondered How much do I really need to retire? As a financial advisor this is probably the number one question I get, along with Is a million dollars enough? What is the number I should shoot for? A new study shows that number has gone up by 20% since 2021. So what is that number and how accurate is that study?
Hey everybody I’m Johnathan Rankin, the founder and CEO of Theorem Wealth management and my firm and I have been helping clients plan and execute their retirement plans by focusing on 3 key areas in retirement, maximizing retirement income, optimizing investments and reducing taxes. If you are thinking about retiring or already retired, make sure you subscribe so you don’t miss any of our retirement videos or episodes of our retirement podcast called the retire once show.
Alright, so what is the magic number? According to the Northwestern Mutual’s 2022 Planning and Progress study, people now believe that they will need 1.25 million to retire comfortably. That is a 20% increase from where it was last year.
With retirement account values dropping because of the market and inflation pushing that magic number higher most people plan on delaying their retirement to 64 which is up from 62 and a half. It was interesting that the study found that working with an advisor and / or being a disciplined planner can shave off a few working years – those two subgroups report anticipated retirement ages of 61 and 62 respectively
Where did this number come from? They don’t go into detail on how people landed on this as the target number. If I am just taking a stab at it, my guess is that people are basing the number off of the 4% rule of thumb and this gives them that nice round number of $50,000. With asset prices where they are today, many people are questioning whether or not that rule should still be followed. In fact we addressed this in our retirement podcast and I will link the episode right here.
So let’s take a look at what kind of retirement you can expect if you have 1.25million.
This is our sample client John Sample – John is turning 64 in January and retiring. He currently makes 90k and wants to maintain that lifestyle. When we take out his current 401k contributions and taxes, he is living off of about 68K of net income. We are going to assume that John is going to take his social security at full retirement age.
As you can see, in this scenario John has a 97% probability of success. The assets will last until at least age 90 and even then he will have over 1mm left over.
This issue is that right now we are facing a lot of uncertainty in the economy and the markets and this plan is modeling a 5% rate of return. One thing I always recommend is stress testing your retirement plan. For John, we are going to look at what happens if he experiences a 20% loss in his portfolio next year.
If that happens, John’s probability of success drops down to 57% and the assets last until age 89. When people see a probability of success at 57%, they automatically think that there is a 43% chance of retirement failure. However, that is not the case. What this means is that there is a 43% chance that you will have to modify your retirement lifestyle at some point in retirement. Meaning that you will have to adjust your spending or maybe pick up a part time job to earn a little income. This does not mean that you will be destitute.
In this example, someone who is retiring with 1.25mm and the only other income is social security, that would provide a lifestyle anywhere between 64k and 72K after-taxes depending on how confident you would like to be in your retirement plan.
Is that enough for to cover your lifestyle? Arbitrary numbers like this are a good starting point, but there are 3 numbers that will help you identify what your retirement needs are.
The first number you want to know is what are your expenses. This number is unique to you and that is the important part. You want to know what you plan on spending money one. Everything from your ongoing monthly bills to maintain your lifestyle to your expectations to travel. Some people will suggest using a general rule of thumb like an income replacement ratio, which is a general way of saying if you make 100k today, you should expect to spend 80% of that in retirement. The problem with that method is the same as saying 1.25mm is good enough for everyone. It is not unique to you. You wouldn’t go to a doctor that just prescribes everyone the same medicine with the same dosage without running any tests. You would want them to understand you specifically, run some blood work, do some scans. You would want a diagnosis based on your specific health. That is the same thing with retirement. We recommend that you spend the time and go through your monthly spending to see what you truly spend.
The next number you want to know is what income sources will you have in retirement? In our example, John only had Social Security. But some people still have a pension, and if you added that into the equation, it changes a lot and the 1.25mm can go a lot further. So whether it is social security a pension or rental income, you want to know what incomes you will have coming to you in retirement.
When you know these 2 numbers, your expenses and your income streams, that will give you the 3rd number we are looking for which is, how much does your portfolio and savings need to make up?
Let’s assume that your expenses are 6k per month and you are expecting 2k from social security and 1k from a pension. Now we know your portfolio has to make up the additional 3k plus an inflation factor. So every year, you will likely be taking at least 36k from your savings and overtime, that will likely go higher because while SS has a COLA, most pensions do not. To then back into the magic number you need, you could look at the general rule of thumb of 4% which means that in order to pull 36k per year using the 4% rule, you will need a portfolio of 900k.
There have recently been a lot of discussion whether or not the 4% rule is still valid and that is why we recommend putting in the work either yourself or working with an advisor to see what you need specifically to retire.
As the study showed, people who were disciplined planners and people who worked with an advisor expected to retire earlier. That is because they had a clear picture of what they needed. It is easy to start the process with our firm to see exactly how much you need for retirement. We believe that everyone should have access to comprehensive financial planning, which is why we offer free retirement assessments. You can use the link below to schedule some time to get started today.
I know I mentioned the 4% rule a few times and whether or not that rule is still applicable, so make sure you check out the episode of our retirement podcast the retire once show where we go in depth on this general rule of thumb. We’ll link to that right here. No matter where you are at in the retirement journey, it is important to have a clear picture of your specific financial goals.
