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DURING THE PANDEMIC, I started devoting more time to retirement planning. But I had more questions than answers. I called a friend who was a financial planner.
“Retirement planning is confusing,” I told him. “I have a lot of questions.”
He laughed and said, “The answer is money. What’s the question?”
While his answer was humorous, it reflected what most retirees already know: Money is crucial for a good retirement. While it isn’t the only thing you need for a happy retirement, it certainly helps.
How much money do you need? There are many variables, including an individual’s cost of living, retirement aspirations and health, so general guidelines can be risky.
Still, we know retirement can be expensive even if you don’t travel extensively. Health care expenses continue to rise. Even general inflation often puts a squeeze on retirees’ budgets. One rule of thumb says you need 80% of your pre-retirement income to maintain your standard of living once you stop working.
What does that mean in terms of savings? Americans spend roughly 20 years in retirement, on average, but some people will live far longer. Experts say, at retirement age, folks should have savings equal to 10 to 12 times their annual income. For instance, if your annual income is $80,000, you might target $800,000 to $960,000 in retirement savings. If you have other sources of retirement income, such as a pension, you can likely make do with less savings.
Most folks don’t come close to hitting such savings targets. According to the Federal Reserve, households headed by someone age 65 to 74 had average retirement account balances of $609,000 and median, or typical, savings of $200,000.
Ideally, you should start saving for retirement early in your career, socking away perhaps 10% to 15% of your income. To get a sense for whether you’re on track for a comfortable retirement, try playing around with HumbleDollar’s Two-Minute Checkup.
If you’ve spent many decades saving diligently, allowing yourself to enjoy those savings once retired can be a struggle. A BlackRock study found that most retirees still had at least 80% of their nest egg remaining after two decades in retirement. Uncomfortable spending your nest egg on yourself? Instead, you might use the money to make gifts to family members or to charity.
Now that my wife and I are retired, I’m hoping Social Security and my pension will be enough to cover our regular living expenses. To make this happen, we worked longer, delayed taking Social Security, downsized and cut back on other expenses. We’ll end up dipping into savings to pay for unexpected costs. But we hope such expenses will be few and far between, so our savings will keep growing, at least during our early retirement years.
To quote George Bailey as he’s talking to Clarence the angel. Clarence says, “We don’t use money in Heaven.” George says, “well it comes in pretty handy around here, Bub.”
We can get all metaphysical about retirement and delve into purpose and meaning, but none of this matters until one has solved the money problem first.
Recently I was consulting with my daughter on her finances. Since she divorced years ago I have spent a fair amount of time helping her get her finances in order. I managed to get her disparate retirement accounts into one Vanguard account.
Just this year she has been able to max out her 401K, Roth IRA, and HSA.
I was recently meeting with my fee only financial advisor regarding the logistics of starting Roth IRA conversions for my wife and I, and mentioned that I felt that I had brought my daughter as far as I could with my investing knowledge. I felt that I did not have the knowledge of California tax law to help her limit this tax liability, nor the knowledge on how to expand into taxable investing. I felt like a California based fee only based CFP was in order.
His response pleased me as he felt my daughter and I had done all the necessary heavy lifting. He stated that at her age (38) she was well set up and the cost of a financial advisor was not necessary.
Oh yeah, and she has no debt!
Good Dad! I did something similar when my daughter divorced after 10 years. Matter of fact, I encouraged her to delay her divorce for 4 months, to past over the 10 year period, for “social security benefits from prior spouse” purposes.
Kudos on great focus & effort!
👍Aced it!
Thanks. My financial advisor did say that not too many of his clients can get into the “nitty gritty” of investing with him. He also stated he thought my daughter was fortunate to have me as her financial advisor, which felt pretty good.
The number we use to determine financial readiness for retirement is disposable income replacement. We calculate disposable income by subtracting taxes (federal, state, Social Security, Medicare, and property) from our gross income; and then subtract our annual retirement savings (401(k), IRAs, I-bonds, taxable brokerage account, and high-yield savings) from that.
When our estimated disposable income in retirement (with no earned income) was at least as much as our disposable income while working, we considered ourselves to be financially ready for retirement.
We became “super savers” a few years ago and in 2023 our gross income was distributed in these percentages: 22% taxes, 33% savings, and 45% disposable. We feel quite comfortable with that amount of disposable income at our current spending level and did not deny ourselves anything due to not having enough money.
Since I am making my when-to-retire decision on a year-by-year basis I have a spreadsheet where I run the numbers for the next year with these scenarios: 1) full retirement with no earned income; 2) work part time at 50%; 3) work full time for about 9 months until 401(k) is at maximum (and my mid-year annual bonus has been paid); 4) work full time for the entire year. I use an online tax calculator to determine the taxes paid for each scenario and I adjust the savings amounts and distribution from IRA amount so that the disposable income is the same for each scenario and the same as it has been for the past several years.
When I started doing this spreadsheet I was quite surprised about how little tax we would pay once we have no earned income (scenario #1). Thanks to the much lower taxes, no additional retirement savings, and my wait-to-70 social security benefit, the IRA distribution needed to keep the same amount of disposable income is only about 2% of our retirement savings. If the numbers hold up when I start my RMD in two years, about half of the RMD will be used for spending and about half returned to brokerage investments; and of course we will likely increase our charitable giving via QCD’s.
At the other extreme (scenario #4) we use the spreadsheet numbers to determine how much of our 401(k) contributions need to be made pre-tax to keep our MAGI below the estimated and dreaded IRMAA threshold.
About QCDs: We recently enabled IRA check writing on my rollover IRA account now that I am age-qualified for QCDs. I am thinking that the QCDs are a kind of on-ramp or gateway to the de-accumulation phase. When we start writing checks for QCDs will be the first time even a penny will escape from our retirement accounts. For the next two years the QCDs will be tax-advantaged giving without increasing our taxable income and will help reduce my first RMD. And we will effectively have more spendable income since the giving money is not coming from our cash.
If you started retirement with a pension, you are already better off than 85% of working Americans.
Ideally, that combined income should allow for modest savings to be used to build cash reserves so that unexpected costs don’t cause unplanned withdrawals.
“Hoping” a pension and SS cover expenses sounds a bit tentative. What percentage income replacement was your starting point?
Agree, SS and pension together help greatly. I spent a lot of time trying to decide between lump sum payment vs pension. Finally chose pension as the best option. My % Income replacement at starting point is about 70%.
That was the best choice in my opinion.