How Much Do I Need to Retire?

By Ralph Bovitz, CPA, PFS 

How much do I need to retire?  The real question is, how much will I spend in retirement? As a rule of thumb, if you have liquid assets that are 50 to 100 times greater than your living expenses during retirement, you probably don’t have to plan.  On the other hand, if your liquid assets at retirement are less than 5 times greater than your living expenses during retirement, planning won’t help! If you’re in-between these two extremes, you have to plan for retirement.  Let’s put some numbers to these rules-of-thumb.

Planning to spend $50,000 a year during your retirement years, with an investment portfolio of liquid assets totaling $2.5 to $5 million should result in a comfortable retirement. Of course, this assumes certain conditions in that portfolio and your desired standard of living.    For example, are you prepared to dig into principal when necessary?  Are you prone to extravagant expenditures from capital, like buying a yacht, airplane or investing in the latest hot stock?  How large an inheritance do you want to leave family members?  Do you have any obligations to others, such as a disabled child?  What is the impact of inflation and tax rates on your portfolio?

Determining your standard of living starts with a thorough understanding of your current living expenses and debt, in today’s dollars.  How much are you spending on the necessities: food, clothing and shelter?  From there, ask yourselves (your spouse should participate in this effort), what activities do you want to participate in after retirement?  Traveling, golf, advanced education in your current careers, or in new careers, hobbies.  Clearly, these new expenditures in retirement nullify another rule-of-thumb:  Expect living expenses after retirement will be 70% of those in your working years.  The assumptions governing a 30% reduction are that many expenses are directly related to working and since you don’t work in retirement, these work-related expenses are gone.  What are some of these potential work related expenses: wardrobe and entertainment are two.  While these work-related expenditures may disappear, more leisure-activity expenses may quickly replace them.

         Another important consideration is how long will your retirement nest egg have to support you?  If you rely on mortality tables, as the predictor of how long the money must last, you may run out of money before you die.  With advances in medicine and science, we are living longer.  Thus, a person age 65 has a life expectancy of xx, for a male, and yy, for a female.  Many financial planners will use age 95 as the end-of-life year, to provide a cushion in their calculations of how long the money must last, since no one can predict a date of death.  Recent articles in the Wall Street Journal, however, talk about future life expectancies of 100, 110 and even beyond!  Thus, it is important to make regular reality checks:  How much are you actually spending in retirement?  Is your portfolio keeping up with your projections? How is your health?

Once you determine your desired standard of living, determine your income sources.  How much can you expect from Social Security or pension plans?  Social Security as a resource has become doubtful to some.  Omitting Social Security in your calculations puts an added burden on your portfolio, to meet expense during retirement.  Your portfolio must meet living expenses not met by Social Security and pensions, whether in tax deferred or taxable accounts.

        After you determine how much you need to retire, look at your current portfolio.  Will that portfolio support the standard of living you have calculated?  If you are close to retirement, what your portfolio is will probably have to do.  If it is too “little”, (less than 5 times your desired living expenses, for example) it is unlikely that you will be able to design an investment plan to solve the problem.  If you are many years away from retirement (say 25 or 30 years), then armed with an idea of your living expenses after retirement, you will know your target – how much you need to retire comfortably.  With a 25-30 year time horizon, you need to design an investment portfolio to meet your target.

A final note.  If your portfolio contains a significant investment in equities (stocks), it’s a mistake to sell them at retirement. If the equity segment of your portfolio is inadequate, you may not be able to keep up with inflation.   Equities, historically, provide a portfolio with the means of coping with inflation, not available with fixed-income investments.

How much you want to spend in retirement is a paradigm shift in thinking from “how much do I need to retire?”