This question is usually first and foremost on people’s minds when they contemplate when they can retire and what sort of lifestyle they will be able to enjoy in retirement. And it’s an important question – but one that’s not simple to answer. Most important, there are a lot of other questions you need to ask – and answer – before you can answer this one.
First, an important disclaimer: I am not a financial planner. The purpose of the website is not to dispense investment advice. I wholeheartedly recommend that you work with a good financial planner to find the best investment strategy for your circumstances.
Instead, the purpose of this website is to help you with all of the other considerations you need to think about in order to visualize, plan for, and ultimately enjoy a fabulous retirement. But these topics are inextricably linked with financial concerns, so I will talk about money in these contexts.
The biggest concern I have with the vast majority of books, articles, presentations, and employer benefit plan communications, is that they don’t address these other questions.
If I told you, “In order to have a happy, comfortable life, you need to find a job that pays you $100,000 a year,” how would you respond?
You would probably tell me I’m full of crap, or at least you’d tell me that I’m being naïve and simple. And you would be correct. Why?
For starters, many people comfortably live on less than $100,000, while for others (say, a family of eight living in Silicon Valley) trying to live on $100,000 a year would be very difficult.
More important, most of us know better than to equate happiness and comfort with some monetary income figure. Certainly, having a larger income does remove some challenges associated with having a smaller income, but it doesn’t by itself bring happiness – especially in retirement.
Yet, most of the books, articles, and presentations about saving and planning for retirement talk only about how much money you need to save for retirement. Do you see what’s wrong with this picture?
Depending on what source you read, they will tell you that you should expect to need 80%, 85% or even 100% of your pre-retirement income to sustain yourself during retirement. But just as it is simplistic to assert that you need a certain level of income during your working years, it is equally simplistic to assert that you need a certain percentage of your pre-retirement income after you retire. Such figures are averages or ballpark guidelines, designed to apply to average people.
Are you “average?”
Of course not. The fact that you’re reading this website means that you are way above average! (Sorry, I just couldn’t resist.)
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This topic is explored in greater depth in my book Design Your Dream Retirement. This book will show you how to visualize your retirement in an optimistic, possibility-filled light, and provide you with the knowledge and tools to help you create a plan for achieving your retirement dreams. You will learn how to fill your life with a balance of activities and pursuits to keep you happy, healthy, and fulfilled.
In order to effectively estimate how much money you will need to retire (both a net worth figure to strive for, and a monthly withdrawal to expect), you need to address many other considerations. For example:
At what age do you want to retire? By the way, many people actually retire a few years sooner than they planned, due to factors such as unexpected downsizing, injury or health issue, or a tempting early retirement incentive package.
Where do you plan to live after you retire? Will you move to an area where the cost of living is higher, lower, or comparable to your current location? Will you maintain two or more homes for seasonal migration?
Do you plan to downsize? Or do you hope to move to someplace more upscale than your current surroundings?
How much do you plan to travel? If so, how much and what kinds of travel? How expensive?
What hobbies and activities do you plan to engage in during retirement? Will they cost a lot of money (for example, country club memberships or greens fees)? Might they actually make some money (for example, selling books or artwork you create)?
Do you anticipate any financial windfalls, such as an inheritance or the sale of your business?
Do you anticipate any financial hardships, such as caring for an aging parent, a special needs child or relative, or health issues of your own?
There are many more things that are unique to your life and your desires, but you get the idea. It may be difficult to attach a price tag to many of these items, but the process of gaining definition and clarity about your retirement goals will help you do this, and it will ultimately help you answer the question, “How much money do I need to retire?”
©2013 Dave Hughes. All rights reserved.
Photo credit: Nick Adams
4 Responses
Communication is number one. I like to take Dave’s articles and discuss them with my wife.
Thanks, William! Sometimes it can be eye-opening to discover that two spouses envision their retirement differently.
Another thought provoking article, Dave. Ideally, we all would have well crafted, customized retirement plans, buffered against some reasonable worst case expectations for what might go wrong with the plan, and a saving strategy to match. But if that’s too much, then at least having any saving strategy is better than none at all. But the other thing I’ve learned is critical, is communication with a partner/spouse about retirement goals, and alignment on a joint strategy. Even having such a discussion can be enough to drive the right kind of focus.
Hi Aidan,
You’re absolutely right on all counts. You bring up a good point about communication and alignment with your spouse. I just finished reading an excellent book about this (as well as having some good conversations with Jeff) that I’ll be posting about soon.
Thanks for your comment!