Retire on a Million?!
Pro tip: You need a lot more than you have...
ONE MILLION DOLLARS has long been the benchmark for how much retirees need to have saved for a comfortable retirement, writes Nilus Mattive in Addison Wiggin's Daily Reckoning.
However, it appears a cool million doesn't go too far these days. A new report by GoBankingRates, looked at how long a nest egg of $1 million would last in the US
The study compared average expenses for people age 65 and older, including groceries, housing, utilities, transportation and health care.
Not surprisingly, the longevity of the $1 million nest egg really depends on where you live. The money stretched furthest in states like Arkansas, Mississippi and Tennessee, where retirees could live in leisure for at least 25 years.
But, in Hawaii, that same $1 million will only get you just shy of 12 years – mostly because of the higher cost of living and expensive real estate in the Aloha state.
The study also points out the average person retires at age 63 and has a life expectancy of 85 years. So if you're expected to spend 22 years in retirement, how much will you need to retire comfortably?
That's the burning question everyone has. While there's no exact formula to determine this magic number, there are some pretty good rules-of-thumb that'll get you close.
Here are few questions to get you started:
#1. How Much Will You Spend Once You're Retired?
Step one is figure out how much you spend now. Build a budget and start tracking your expenses so you know exactly where your money goes each month.
There are a couple different schools of thought when it comes to calculating your retirement nest egg goal based on your burn rate. Some experts suggest you'll need 70-80% of your pre-retirement income after you finish working.
Others say you'll need at least 100% for the first 10 years into retirement. It's a myth that spending slows down once you're retired – if anything it goes up, at least in the first few years.
Another strategy is to have 10 times your final salary in savings if you want to retire by age 67. If you follow the 10x rule, here's what that might look like for your savings over 30+ years:
By 30: Have the equivalent of your salary saved
By 40: Have three times your salary saved
By 50: Have six times your salary saved
By 60: Have eight times your salary saved
By 67: Have 10 times your salary saved
#2. How Long Will You Live?
This is nearly impossible to predict so it's sort of an unfair question. However, people are living longer now. A healthy, upper-middle-class couple who are 65 today have a 43 percent chance that one or both partners will live to see 95.
If your parents or grandparents lived well into their 80s and 90s, then chances are you'll live that long too. But living longer comes at a cost.
The Bureau of Labor Statistics estimates that mean healthcare spending for seniors is close to $6,000 annually. And seniors are statistically more likely to experience major health emergencies.
It's also worth noting that Medicare won't shield you from high healthcare costs. In fact, you'll need to pay Medicare premiums as well as coinsurance costs, which can be quite high.
Having a dedicated fund, ideally in a health savings account, to cover health care costs during retirement is a good idea.
#3. Should You Follow the 4% Rule?
You're probably familiar with the 4% rule, also known as the safe withdrawal rate. Which is basically the rate at which you can spend your money without running out because withdrawals primarily consist of interest and dividends.
To figure out how big your portfolio needs to be, you divide your annual spending by 0.04 (or multiply it by 25).
For example, say your family spends $45,000 per year.
$45,000 x 25 = $1,125,000
You'll need a $1.12 million nest egg to support yourself for at least 25 years.
If you're wondering why 4% and not 2% or 10%? The four percent rule is calculated based the average rate of investment returns minus inflation. Historically, the stock market has returned an average 7% per year and on average inflation is about 3%.
7% – 3% = 4%
So your net worth should increase by about four percent each year. If you spend that four percent, you should end the year with the same amount you started with and the cycle will continue.
The 4% rule is a solid rule of thumb. Since the early 1900s, it's held true. However, experts are less optimistic about what future markets hold so there's been a push for a more conservative 3% rule. But living off 3% is a lot less attractive so you'll have to be the judge of what you can sustain.
The other option is to aggressively ramp up your savings. Savers can double, on average, their nest eggs in the last decade or so of their working lives, thanks to compound interest.
These are just a few ways to find your retirement target. Once you have a number in mind, there are three things you should do:
- Save as much of your income as you can. If your employer has a 401(k), the contribution limit for 2019 is $19,000 for workers under age 50. If you're funding a Roth IRA or traditional IRA, the maximum yearly contribution is $6,000 for workers under age 50.
- Automate your savings. Have your employer deduct your savings from your checking account straight into your retirement account. You can't spend what you don't see.
- Increase your savings consistently. Either every six months or at the end of every year when you get a raise, you should be upping your savings. You can do this by setting up "auto-increase," so you don't forget.
If you follow these three steps, you'll be in good shape to hitting your retirement number.