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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.