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Not a day goes by that I don’t read something like “Americans say they will need $1.8 million to retire or $1.46 million or $X million” to retire “comfortably.” “Experts” say it’s a multiple of retirement expenses – 25X I think – as if those expenses are steady and predictable over a retirement lifetime.
Of course, many headlines talk about $1,000,000 as well.
I see posts on social media- “I have $800,000 saved, can I retire?” The answers in reply are entertaining because based on the limited info given – actually none – a answer is not possible unless it is yes, no, or maybe.
In theory at least, $1.4 generates an income of about $56,000, but even that requires the right investments to sustain that income (withdrawal rate) and money squirreled away in a money market account probably isn’t it. Oh yeah, we should ask what you plan to spend in retirement?
Given the national median household income of $78,171, a couple with $1.4 million plus Social Security could retire with (let’s not go there) a hefty percent income replacement.
Needless to say, as often discussed on HD, there are many questions that must be answered before knowing how much a person needs to have accumulated in order to retire – on their terms.
It seems Americans like to throw around big scary numbers – to retire, raise a child, pay for healthcare, LTC. Do those numbers really mean much when you get beyond averages and into each persons real world?
I’d rather focus on constructing an adequate, sustainable income stream.
For example, a $300,000 immediate annuity investment could get $1,255 a month for a retiree and spouse’s lifetime with a 2% inflation adjustment and return of unused investments to beneficiaries. No spouse? Make it $1,418 per month.
A person earning $78,000 and retiring this year at 67 could receive about $2,158.00 per month in Social Security income or $25,896 per year (50% more if married). Add the annuity of $15,060 and a stream of $40,956 income is created or possibly $53,994 with spousal benefits. That’s about 70% income replacement which many people feel is adequate or close to it.
Not enough? Add some dividends and interest, perhaps capital gain distributions.
Isn’t building retirement income based on dollars practical to the individual, the way to go, rather than a big one size scary number?
This has been an enjoyable forum to read with a number of different perspectives. I’m approaching 56 and have wanted to retire early but didn’t know how to get there and am cautious about making a mistake in this decision. HD has been very informative in the thought process. Philip Stein’s HD article (https://humbledollar.com/2023/10/a-profitable-read/) and its citation of Bernstein’s Four Pillars of Investing unlocked a retirement income path I’ve become inclined to trust. The part that helped the most is having as much ‘safe assets’ as possible to pay for a number of years of living expenses. From this I created a spreadsheet that focuses on annual income from 2028 to 2070 to see what I could reasonably expect. I broke our assets into risk assets (all but safe and nonliquid), safe assets (as defined by Bernstein), and nonliquid assets (mostly our home). I transfer 6% of safe assets per year into withdrawal for income and replenish that amount annually from the risk assets. I assume no growth on the safe assets, providing a semblance of accounting for inflation. The risk assets grow at 6% per year. The annual withdrawals amount to about 2% of total assets. The nonliquid assets grow at 2% per year and aren’t reduced along the way, thinking this may account for wherever we live, including long term care. To this I add expected income from annuity-like (though with more uncertain upside and downside) investments in first 10 years of retirement and then SS starting at age 70. The pretax retirement income is roughly 70% of present pretax income. I’d like to work on rough budget for this income, as well as which accounts withdrawals should come from, but it looks like retiring at 59 is reasonable. Using conservative assumptions adds to the likelihood of success. So I offer this as an income-focused approach to the retirement date decision.
I tried editing this spreadsheet to what I think most folks might have to work with and it seems like one would need a fairly large net worth, annuity-like income, or SS to make retirement sustainable. Going back to saving and investing for many years is again a take-home lesson.
Long ago when I still worked, the company used to offer a little seminar to help managerial employees learn how to do time and goal management. The piece of this that generated the most discussion was how to deal with a huge objective that could not be accomplished within a single annual planning period. During the seminar the participants would look at their own departments and have to come up with issues that needed to be addressed, and create some objectives to improve their department’s performance. None of the work product went anywhere upstream so participants felt free enough to discuss real issues.
The moderator always discussed how to break down the huge problem/goal into smaller, shorter term pieces that could be addressed during the current planning period.
This is what folks need to do to come to grips with that big number and then make progress on doing things that help them get there. Just dissing the idea of having the big goal isn’t the most helpful sort of approach. And the frequent articles that point out how big and overwhelmingly difficult reaching the goal might be are just demotivating.
Solutions to the retirement puzzle require some thoughtful work. Can one reduce current expenditures and create surplus funds? What debts exist and can they be repaid? What assets are/will be available (pension, savings, SS, home equity, investments) and how might they be deployed to fund a retirement? Could the existing situation be improved by an ultimate retirement relocation?
For most people, comfortable retirement means having less comfort during ones working years. The squirrel that doesn’t bury enough acorns in Summer starves in Winter. This is a hard truth.
Finally, there isn’t a single solution that fits everyone. People who were retired in the early 70’s with pensions/annuities struggled to get by when inflation was high in the late 70’s and early 80’s. Even just a few years ago, when the Fed had interest rates set to zero, buying an annuity wasn’t (in my opinion) a very good choice. Most people will need a group of cash flow sources…,
My approach has been to target retirement investment savings with S.S.that would replace my current income until age 100 with inflation and a 20% buffer in case of market crashes. To this I added $20K a year for travel and $20K for charity. The market has been kind and I’ve met my target.
reply to Matt Morse
Another rule of thumb is to have 11 times your annual salary saved in retirement assets. In my experience, this is much easier to achieve than accumulating 25 times your annual expenses. As a result, I aimed for the 25 x annual expense because it IS harder to achieve and made more sense to me and ties nicely into the 4% withdrawal rate. Another challenge with this metric is the fact that you would have to know what your actual expenses are. How do you know? You have to track each expense month in and month out. A lot of work, but it can be done, and it provides an individual target that is suitable for their personal situation for savings and expenses. Unfortunately, as others in this thread have alluded to – it is a BIG number.
I don’t think a rule of thumb based on income during working years is very useful. Yes, as you approach retirement you must estimate expenses. There is no way around it. The closer you get to retirement the easier and more accurate it becomes.
Rather than trying to come up with a “number”, younger people could just use an annual savings rate as a goal instead. We were able to save 20-30% and raise five kids on an average income. That’s put me in a position to retire in my mid-50s, but I can’t know if I can retire without knowing my expenses.
That’s an amazing accomplishment 👍🏼
Thanks, Dick. I was blessed to learn early about frugal living, low cost investing, and staying the course.
I have used Quicken to track my finances for many years. It’s not that much work as it connects to my bank and to my credit card issuers. It downloads my transactions and allows me to categorize them. When I had a fee-for-service financial planner run the numbers for me to check whether I could afford a move to a CCRC I simply handed him the printed summaries from Quicken.
Thanks, Richard. Monthly cash flow is definitely what it is all about… same as when we are working. Throw in accounting for inflation and it can be as simple as that. Considering an annuity for anyone in their 60’s is probably worthwhile, especially at today’s higher interest rates.
“Do those numbers really mean much when you get beyond averages and into each persons real world?”
No, those numbers don’t mean much to an individual. Those articles are mostly click-bait.
“Isn’t building retirement income based on dollars practical to the individual, the way to go, rather than a big one size scary number?”
No. For most people, building retirement income that will last a lifetime means having a “big one size scary number”. Even annuitizing your income, which you seem to be advocating, takes a large lump sum that has to come from somewhere.
Isn’t that big number the result of developing the retirement income need first?
If you mean determining how much retirement income you need, isn’t that the same as estimating your expenses?
Short answer to the question is no.
For those without secure annuity income ( trad pensions) and SS kicking in at a variable future date, knowing the ballpark number is essential to the question of “when can I pull the trigger?”. And accepting risk throughout retirement is going to be part of the game, as is a flexible attitude to derisking as life develops throughout the period.
It’s good you’ve done some research on SWR as it seemed to be a gaping hole in the knowledge base of someone who blogs on retirement finances but my impression is you’ve boxed it off as “too difficult” given your aversion to spreadsheets etc and reverted to type on “Quincome”.
Here is the way my simplistic mind works.
During my projected retirement years healthcare will cost $300,000 for each of us. Our property taxes will be $337,000. That’s about a $1 million.
Gee, I’m never going to be able to retire with those numbers. Make sense? Of course not.
What makes sense to me are the sources and monthly amounts I need to generate sufficient income (money of any type) to pay the bills be they higher, the same or lower than pre retirement.
That’s all I tried to illustrate in the post. The less variable that income the better.
“The less variable that income the better.” Withdrawing money from an investment account is no more or less variable than a monthly annuity payment.
“The less variable that income the better.”
Oversimplification. That is true if you want to work more years and have complete security.
If however you believe in statistical data re past markets performance you can embrace the idea that your annual returns may be highly variable but in no known past scenario will you actually run out of resource.
I accept you’re the safety first personality type and you probably don’t like being told you worked more years than you needed to. But based on what you’ve shared here about your resources at 80ish it feels like you did.
No matter of course if you were still enjoying your job and feeling stimulated to the end but not every job is like that and in many workplaces you can be seriously stifled for opportunities post 50 as the cult of young and confident with the right buzzwords is rewarded.So for those people knowing how to quantify THE NUMBER may be life changing.
Instead of being scared by big numbers, wouldn’t someone be better off to try and understand them? Let’s think about the example family – $78,000 in current income. Replacing all of that using the 5% rule requires $1.95M (25 x $78,000). In the example the retirement income of $53,994 comes from a $300,000 investment in an annuity, and SS with a present value of about $600,000 (per Open Social Security). Total present value of about $900K. Not so scary.
To make up the difference to 100% income replacement is another $24,000 per year, or about $455,000 investment in a similar annuity. You also mention dividends and interest possibly making up the difference. To get $24,000 in income at a 4% withdrawal rate requires an additional $600K.
With their SS benefit the example family would need about $750 K in retirement funds if they were willing to annuitize all of it. If they only did the $300K annuity, they would need a total of $900K.
I’m sure this kind of math is second nature to most of the HD community. For future retirees that don’t have DB pensions, their challenge is to convert retirement savings into income. Understanding the relationship between a chunk of savings and what realistic income that can provide is the key.
My question – without thinking about big numbers how does a 30 year old know if they are saving enough for retirement?
Com’on Rick there is no relevant present value for SS. Don’t know one person who ever considers that or has any reason to do so – well, maybe an engineer or two? I think you mean the 4% rule.
My pension has a present value, that’s a really big number I guess, who cares? Only once did I care when it was used to calculate the check I had to write for Medicare taxes.
I mentioned about 70% replacement not 100%. Throwing around big numbers for average Americans is scary and may well prevent some people from doing what they need to toward their retirement savings.
As I said, the numbers need to be relevant to an individual. I’m pretty sure millions of Americans don’t need or expect to have $1,000,000 plus SS so what relevance is there when they read that in the press?
What I hear some say is “I guess I will never retire.”
Dick, you either missed or skipped over my first sentence. What I’m suggesting is making the effort to understand the math behind the “big scary number”. I find understanding things makes them way less scary. Every series of payments, be it SS, an annuity, or a DB pension, has a present value. It’s a key concept in finance. I find it comforting to know that my future SS represents a nice 6-figure amount, a nice kick start to retirement planning.
In your example you state that a $300K annuity investment provides a $1,255 per month payment. That’s no different than saying the PV of a $1,255 monthly payment is $300K. Similarly, about $600K would be needed to replace the retirement benefit that SS is providing the couple. If I were part of the example couple I would like to know that I had an equivalent nest egg in that amount.
Many HD contributors lament the lack of financial knowledge in the general population. Shouldn’t we be promoting greater understanding of basic financial concepts, instead of dismissing them?
And yes, I meant the 4% rule. Thanks for the correction. I need to work on my typing.
I guess where we won’t agree is that anyone has an equivalent nest egg in Social Security since no one can ever use it as a nest-egg in any case.
Now, if a person believes their SS is going away and they may need to replace it, you have a point.
‘’The same for a DB pension. Unless there is always a lump sum option before or after retirement the PV is only relevant to the actuaries recommending funding obligations.
Come on, Dick. We just had an entire thread about the value of present value calculations in assessing Social Security and pensions. In that thread, you acknowledged being in the minority and being befuddled, and yet here you are again dismissing the whole notion, saying you “don’t know one person who ever considers” the present value of Social Security. Hmmm.
My bad, I should have said not one person beyond that HD discussion. But in many many discussions about SS outside the HD Forum, the concept never came up. And, yes I am still befuddled because I cannot see how the PV of SS can be used. It’s a life annuity with no options to be otherwise. I surely am missing something.
If you hung out on the bogleheads forums, especially personal investments, instead the FIRE ones that annoy you so much, you would find a lot of sensible and actionable advice on financial needs in retirement.
Never been to a FIRE forum. Those numbers are from national publication sites, YouTube planning sites, etc.
You have frequently mentioned hanging out on FIRE sites.
Sure I’ve looked at some, but hardly hang out. I’ve lost interest in that in any case. Haven’t been to one in a long time -.interesting though, the couple that I did visit in the past have all but shut down. The sites are still there but have not been updated in many months even over a year. I wonder if FIRE is kaput.
Lots of fact-checking going on in this thread. Good thing Dick isn’t running for office this year.
I had reached the number I had in mind by the time I retired. I didn’t view it as a big, scary number. I viewed it as a goal. A means to an end.
There are several writers on the MarketWatch and Yahoo/Finance websites that routinely answer the “do I have enough to retire” to question. I also often wonder if they are made-up or honest questions. Still, the reality is that many people approaching retirement are not prepared and haven’t given much thought to retirement expenses, taxes, income needs, debt, estate planning, and medical/LTC needs, to name a few.
I think the people who read HD are very much clued-in as to the relevance of these questions – – – and are still searching for a better understanding of what happens next. Many of us probably consider what a mid-course correction would look like if required. I don’t see anybody writing about that.
By mid-course correction you mean ?
Corrections can work in both directions. On the downside, I’m talking about a mid-course correction to account for things like getting sued, being sick or in a wreck that requires a long recuperation (like LTC but not when approaching end of life), gray divorce, or unexpectedly needing to raise grandchildren.
On the upside, it might be winning the PowerBall lottery or receiving a large and unexpected inheritance.
Gee, the upside seems to have pretty poor odds.
I agree with your basic premise, media tends to sensationalize retirement issues to increase readership. It’s also part of the narrative, that we need government help or we can’t possibly retire with comfort and dignity.
I’m thinking at 30% to 40% of pre-retirement income for most people that SS is a definite need.
It is now that it’s an “entitlement”. I would have gladly declined participation given the choice and 7.65% of every paycheck. I would have retired very rich years ago.
I love it when people say that – they do often. The thing is SS is much more than retirement income and provides benefits to many people not retirees or not even in the workforce – ever.
As FDR said it was to help deal with the vicissitudes of life. Your plan might work if everything worked exactly as planned your entire life even after retirement.
If 6.2% (actually) on limited income would have made you rich, I can’t image what 15% with employer help in a 401k does. 😎
Richard, the type of articles you mention are a great example of professional writers trying to keep their jobs. They are ridiculous for all the reasons you state.
How about local TV news anchors who seem to be experts on every topic under the sun?
Someone like me who wants to retire in my mid-50s with no pension, needs a “big, scary number”. My expenses will be relatively modest, so my number doesn’t need to be as big as people’s retiring in high cost-of-living areas, or with a mortgage or rent payments. It’s all about expenses and everyone’s are different.
How do you know it’s big and scary until you figure out expenses for the way you want to live for 35-40 years?
It’s not hard. There’s a good rule of thumb that will get you close enough to have a very comfortable retirement and it’s not 100% of working income. That’s a big, scary number.
Which rule of thumb?
Twenty-five times annual expenses minus other annual income, in first year of retirement. That will most likely be more than enough.
No debt in retirement is key. With zero debt 100% of your working income is not necessary. I focus more on controlling costs to be under retirement income whatever the source. Part of that control may mean adjusting lifestyle. It’s what we did when we were working. You live within your means. Life is about constant adjustments. Retirement is no different.