It’s a common question: “How Much Do I Need to Retire?” It’s one of those questions that we know is surrounded by vagueness and uncertainty but we still continue to wonder what the definite answer could be. Unfortunately, there is no one right answer as it is going to depend on your own situation and specific circumstances.
Due to the number of variables and options involved with retirement, this is where planning can become overwhelming for most. And this is where the value of hiring a financial planner can bring you peace of mind. We’re trained to take the most complex questions and put them in quantifiable terms for you to better understand your options.
If you don’t have a planner, all hope is not lost! You can still answer this question of “how much do I need to retire,” by following a few rules of thumb to at least get a general idea of what your number should be.
The 4% Rule
There is a little reverse-engineering involved, however, once you do some simple math this will give you a good idea of how much you need to accumulate in order to live off of 4% per year.
For example, let’s assume you need an additional $65,000 of income each year in addition to your social security income. If you know your annual distribution rate cannot exceed 4% each year but need to withdraw a minimum of $65,000, you simply take $65,000 and divide it by .04. The figure we calculate is $1,625,000.
This is the portfolio value you will need to accumulate at retirement in order to be able to safely withdraw 4% each year. Again, not exact, but it will provide you a general idea of your portfolio needs.
Save 10x Salary by 67 Rule
This rule was designed by Fidelity in order for savers to see whether they were on track for retirement. I reference this rule quite often as a quick way to benchmark yourself against what is ideal.
Here is what Fidelity recommends:
- At age 35, you should have 2x your salary saved. In other words, if you make $150,000/year, you should have at least $300,000 saved across bank accounts, investment accounts, and retirement accounts.
- At age 45, that goes up to 4x your salary saved.
- By age 55, it nearly doubles once again to have 7x your salary saved.
- And finally, by age 67, you should have 10x your salary saved.
Multiply by 25 Rule
This is a very simple and quick way to figure out your number. You simply take the income number you need in retirement and multiply it by 25. For example, if you need to withdraw $65,000 from your portfolio, you multiply that figure by 25. You get the same outcome from above in our first rule, the 4% rule, $1,625,000.
This is basically assuming that you’re withdrawing from your portfolio for 25 years, such as from age 65 to 90.
Things to Keep in Mind
With people living longer, retiring sooner, or living a non-traditional retirement lifestyle, the numbers are going to vary. These “rules of thumb” only give you a guesstimate, or general idea of what your number should be if you pursued the traditional retirement of working, retiring at age 60-something, and living until 90.
My belief is that as long as you take action towards saving, save enough but live for today, and retire to your hobby (volunteering, consulting, art, part-time work), that you’re going to enjoy life more, not get bored, and probably live a lot longer too!
If you don’t want to leave this part of your plan up to your best guesstimates, let’s chat further about your options and what you hope to accomplish.