How Much Do I Need to Retire?
The Wrong Question
One of the most asked retirement questions I receive is, “How much do I need for retirement?” Is it one million dollars, five million dollars or some other number? What
exactly is the magic number? Well, according to Fidelity Investments the number is eight! A Fidelity study suggests that you need 8x your current annual salary to be on
track for retirement.
Now is 8x really enough? Fidelity assumes that your investments will grow at a 5.5% annual return. T.Rowe Price factors in more volatility and recommends 12.5x your salary
to be saved by age 65. What Fidelity and others are suggesting is far too generic and flat out wrong.
What if there is another market crash when you’re nearing retirement?
Or you were planning to work until age 65 but suddenly got sick or needed to be home to take care of a loved one?
The Right Question
The main question you should be asking is, “How much income do I need to be able to retire?” Think about it this way, if you were saving $100,000 for your kid’s college
education fund and you reached that goal, would you risk losing that money to a stock market crash? No! You’d be sure to lock in that number and move your money to a
conservative investment vehicle. With retirement income planning the majority of people don’t think about it the same way.
So start by asking the right question, how much do I need to retire?, to ensure you get the
right answer for you and your situation. If your goal in retirement
is to have say $6,000 a month of income, then that’s the number you should work towards. This is a guaranteed income number that pays you (call it a paycheck) every month whether
the stock market is up or down. If you’re still saving for retirement, you need to work backwards from that number. If you’re in retirement, you need to look at your
current assets and other income sources to determine how you can get to your monthly number without adding on significant risk to your portfolio.
In our Financial Matters retirement planning XLT sessions, students
are taught to ask the right questions, in this case, how much do I need to retire? That way they get
the answer that’s right for their individual circumstances and retirement needs. We teach them how to create their own personalized pension plan for guaranteed income for
life. They’re taught proper savings strategies to obtain their income goal and retirees are taught how to safely maximize retirement income potential.