What is the right amount to save when aiming for a certain retirement goal?
I am 58 years old earning $100,000 per year and have investments in multiple retirement accounts totaling $686,250. I'm retiring at the age of 65. I am currently investing $16,000 per year in my accounts. I project to have $848,819 in my retirement accounts at the age of 65. I will be collecting $2,200 in Social Security when I retire. I also do not own my home due to my divorce. How much money will I need to hit my projection? Should I be saving more?
If you are starting out with $686,250 and adding $16,000 per year, you should easily have $848,819 in 7 years. In fact, you will probably have more than that based on historical returns of a diversified portfolio.
But I'm not sure that's the question you are asking.
You may be asking if $848,819 is enough money for you. The first step is finding out how much money you think you will need to live on per year. Then deduct your sources of income like social security and any pensions or annuities you may have. What is left is the gap you will need to fund.
Many financial planners have historically advocated a withdrawal rate of 4% from retirement accounts as a safe amount to pull out. I think that is a little high as 3% is a more conservative amount people should consider for their individual situation. 3% of $848,819 would yield $25,465. Combining this with your social security benefit would give you about $50,000 per year.
Your income requirements minus the $50,000 is what you will need to make up either through additional savings before you retire, a part time job in retirement or a drifferent investment approach to yield higher savings.
So, it looks like you have done a good job saving thus far, but there are still too many unanswered questions as many have hit on cash burn in retirement is key but what will have a bigger drag on your retirement will be healthcare, what types of insurance do you have.
It is estimated that an average, healthy 65-year-old couple will need $245,000 to pay for medical expenses for the remainder of their lives. This does not include long-term care costs*
Healthcare cost will be the 2nd largest expense in retirement**
Medicare only covers about half of healthcare costs in retirement***
*Fidelity Investments retiree health costs estimate, 2015. Healthcare and nursing home costs may vary by state.
** Take Control of Your 6 Biggest Retirement Expenses,” U.S. News & World Report, August 2015
*** U.S. News & World Report, Take control of your 6 biggest retirement expenses, August 2016
We have a great planning tool that we use to help understand and meet our client’s goals. Have a look.https://www.mvmadvisors.com/next-generation-financial-planning/
It depends on your desired standard of living in retirement. It also depends on how your assets are invested. Just to give you some quick guidance, most people don’t spend as much in retirement compared to their working years. Most retirees’ replacement rates are 60-80% depending on how much you earned while working. For those who find themselves in the top quartile of income earners in America, your replacement is more like 60%. 10-20% of that replacement rate will come from Social Security with the remainder coming from personal savings and pensions. So if you have a household income of $100,000, you will probably only need $80,000 for retirement. Why is this the case? You are no longer saving for retirement and you are no longer paying certain taxes like Social Security taxes. $26,400 will come from Social Security with the remainder ($53,600) being funded by personal savings.
If you invest passively via a globally diversified portfolio of index funds and work with an independent fiduciary wealth advisor, you can expect to afford to safely withdraw 4-5% of your entire retirement asset base throughout retirement. For example, if your entire retirement asset base is $850,000 at retirement, you can afford to safely withdraw $34,000-$43,000 per year, adjusting for inflation. So just based off of the information you have provided, it seems like you will be able to afford a standard of living of $60,000 to $70,000 per year, which isn’t too far off from what we would expect you would need. Again, these are just ballpark numbers.
A good first step would be to find out what your individual risk capacity score is as well as take a retirement analyzer to see if you are on the right track. Both of these tools are easily accessible online and will put you on the right foot in terms of determining your retirement readiness.
Save as much as you can while still living comfortably. If you max out your retirement plan contribution limits, you can save in individual accounts. Your date to collect full social security is age 67. I suggest you at least wait until full social security retirement age while continuing to save. In the meantime, develop a list of projected wants and needs; detailed budget of your desired lifestyle upon retirement. If you want to buy a home or move to a new area, take the time to shop around. Consult a good planner.
You should be saving the maximum and live beneath your means. If you are single then you can put 6500 per year into a Roth IRA and a significant amount into your 401(k) plan. You can also put the maximum 4400 into an HSA as long as your health insurance is HSA-compatible. You can keep contributing to your Roth and 401(k) as long as you are working, and you can keep putting money into your HSA until you start with Medicare at age 65 (assuming you do so, otherwise you can keep contributing to your HSA after 65).
If you do all of these things then it won't matter what your target or goals are. You will achieve and surpass them.
If you think you will live to be at least 80 years old then you should delay your Social Security until you reach your 70th birthday. That will give you the highest total lifetime payout especially if you live a long life.