Key Points
- It is such an important question. But it's not a one-size fits all answer. Figuring out how much money you need to save to retire when you want is paramount.
- You must get your information into powerful planning software like WealthTrace to find your number.
- No surprise, how much you spend in retirement is the main factor that will change your retirement number.
It is such an important question-
How much do I need to retire? But not enough people ask it. Even they do ask the question, they are not using the proper tools and analysis to correctly answer this all-important question.
First, you must use planning tools that are accurate. They should calculate your taxes properly, allow for different account types such as Traditional IRAs, 401(k) plans, Roth IRAs, 592 plans, and many others.
Our retirement and financial planning software does calculate taxes and all account types properly. You can sign up for a free trial to give it a try.
How Much Does It Take To Retire Comfortably?
Now we are ready to look at how a person or a couple should go about figuring how to answer, how much money do I need to retire.
Like all financial and retirement calculations, this one involves some assumptions. But as long as our assumptions aren't too absurd, say 7% for equity returns rather than the 10% figure that many people used to use, we can set very reasonable estimate for how much money one needs to retire comfortably.
Let’s start with the assumptions I used for the couple we will look at:
| Inflation (CPI) | 2.5% |
| Current Age of Both People | 55 |
| Age Of Retirement | 63 |
| Age When Both People Have Passed Away | 85 |
| Social Security at age 67 (combined) | $40,000 per year |
| Average Savings Rate | $15,000 per year |
| Total Investment Balance Today | $400,000 (50% in Taxable, 50% in IRAs) |
| Recurring Annual Expenses in Retirement | $70,000 |
| Investment Mix | 70% U.S. Value Stocks,
30% Medium Term Treasuries |
| Return Assumption Value Stocks | 7% per year |
| Standard Deviation Value Stocks | 16.20% |
| Return Assumption Treasuries | 3% per year |
| Standard Deviation Treasuries | 7.20% |
Using Monte Carlo Analysis
We live in a dynamic, changing world, especially when it comes to financial planning. So I like to look at the probability of never running out of money in retirement using Monte Carlo analysis, where thousands of scenarios are run, moving investment returns in all scenarios in every single year. In this example I will define success as having a probability of at least 85% that funds never run out in retirement.
Using our retirement planner I calculated that they will have about $800,000 (in today's dollar terms) at their retirement date. I also calculated, using Monte Carlo analysis, that they would have a 60% chance of never running out of money.
We can make the statement that $800,000 saved is not enough for this couple when they retire. They either need to save more money, retire later, or spend less in retirement.
Saving More Money
Let's take a look at what our retirement analysis says if they save $1,500 more per year. I ran this and found that the amount they have at retirement is now $870,000. Their probability of success now rises to 70%.
Let's combine that with this couple retiring one year later. That now increases the value of the retirement portfolio to about $900,000 and their probability of success rises to 75%. Things are looking much better for them now. So if this couple thinks 75% is a high enough probability of success, their answer to the question: "How much money do I need to retire" would be $900,000.
We can of course keep changing our retirement assumptions until this couple is comfortable with their outlook. The important thing, in order to answer 'how much money do I need to retire' is that all of your data is entered into an accurate retirement planner. Only then can you begin answer these types of questions.
Lots Of Different Scenarios
Each person and couple has a different situation and might need to change a variety of things in order to meet their retirement goals. But it is usually impossible to tell whether or not you can retire when you want until you sit down and actually run through the numbers. At that point you can begin running interesting scenarios that will tell you what you need to do to accurately answer, how much money do I need to retire.
What effect might saving more money have on your retirement plan? WealthTrace can help you find out. See how making small changes to savings can have a big effect on the probability of your plan succeeding. Use a free trial of WealthTrace to find out more.