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4 Factors that Help Determine What You Need to Save for Retirement

Listen to Best in Wealth Podcast Episode 172

“How much do I need to save for retirement?” This is a question I am asked all the time, often before I know anything about the person I am meeting with. Do they need $1 million? $2 million? People talk to friends and family about retirement and question if they have enough. People often think that everyone has the same number. But the truth is that everyone’s needs are different. What you need to save for retirement depends on four factors. Listen to this episode of Best in Wealth to find out what they are. 

Outline of This Episode

  • [1:29] A reminder that I am getting old
  • [3:29] How much do you need to save?
  • [7:08] Factor #1: How much will you spend? 
  • [12:00] Factor #2: How much will you earn on your investments? 
  • [15:3] Factor #3: How long will you live?
  • [17:40] Factor #4: How much can you withdraw yearly? 
  • [21:24] Your number is unique to you

Factor #1: How much will you spend in retirement? 

Do you have a monthly spending plan? Will your spending in retirement be the same as it is now? The rule of thumb is that you will need 80% of your pre-retirement income in retirement. Why only 80%? When money comes out of your pre-tax accounts, it does count as income—minus 7.15% in social security and Medicare taxes. That brings you down to 93%. What else brings it down to 80%? Hopefully, you are maxing out your 401k, which could make up 25% of your income. This can bring it down to 80%. But you need a spending plan to figure out what you will need. 

Any client we work with has to set up a spending plan, which goes in one column. A second column will look at expenses in retirement. There may be other things you are spending money on in retirement that you did not pre-retirement. Are you planning on traveling? We make a goals-based plan for your retirement. We start with necessary living expenses like property taxes and healthcare. Then we add in dream expenses like buying a house up North or your dream boat. 

Factor #2: How much will you earn on your investments? 

You may be thinking, “How will I know?” Well, we know the S&P 500 has averaged around a 10% return for the last 95 years. Secondly, different people have different risk levels. Most people are not 100% in stocks. My riskiest retirees have 60% in stocks and 40% in bonds. Others may have closer to 60% bonds and 40% stock. We expect a lower return in the long run with less risk. To figure out what your number is, you must figure out how your money is being allocated in retirement. We will do things like strategic rebalancing and drawdown strategies to add value to your portfolio. There is a chance you can earn more on your investments. We can come really close to estimating what your return will be before expenses and plan from there. 

Factor #3: How long will you live?

When you are planning for retirement, the age you retire matters. But how long you are going to plan matters, too. Some people plan their retirement to age 110, though the odds of living that long are slim. It is probably not in your best interest to plan that far out. But only planning until 80–82 is not a good rule of thumb either. 

You need to discuss what your health is like. Are you a smoker? What is your parents' health history? Did they live longer than the average person? What about your grandparents? Without knowing your health history, planning until about 93 is a good place to start. Why? There is a 30% chance you will live until 90. If you are married, the odds are higher. But the general rule of thumb is 93. 

Factor #4: How much can you withdraw from your savings every year? 

People with riskier portfolios can probably afford to take a higher percentage out each year versus those with a conservative portfolio. A man named William Bengen coined the 4% rule: If you have $1 million in year one of retirement, you can take out 4% or $40,000. In year two, you take a raise for inflation. If it was 5%, you then take out $42,000. Each year you take a cost of living raise. After 10 or 20 years, you may be taking out $60,000–$70,000. If you do that with a 50/50 portfolio, you have a good chance (93%) of not running out of money. Different rules allow you to take more or less when you need to. Flexibility really helps your portfolio. If you do not have flexibility, you will have to take a consistently low amount. Get the full picture by listening to this episode of Best in Wealth! 

Resources Mentioned

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Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.