When to Retire

How Much You Should Retire With?


It's a very difficult question, and one that almost everyone tries to answer. And to put it simply, I think the answer is: "It depends."


What exactly does it depend on, you might ask?


There are a number of important considerations, like:


1. Do you expect to continue your current lifestyle?
This is one of the most important questions, and the question that you'll hear most retirement planners ask. The common suggestion is, if you want to continue your current lifestyle, you should plan on waiting until your savings can generate at least 80 percent of your pre-retirement income.

Why 80 percent and not 100? You probably won't have a mortgage, or at least might want to downsize your home after retirement. Also, after retirement you won't need to divert money into retirement savings. If you save 10% of your income by cutting out each of these expenses, you can basically continue the same lifestyle without cutting back on spending.

2. Are you planning to move to another location after you retire?
If so, how does the cost of living compare to where you are now? There are a number of cost of living calculators you can use to determine what percentage of your current income you'll need in your chosen retirement destination.

3. What do you anticipate the economic and tax environment to be?
In general, do you expect that taxes will increase? We are currently at a point where taxes are at an historically low level. Will this trend continue or will taxes begin to rise again at some point in the near future? If income taxes rise, you'll need more income to produce the same standard of living.

4. Do you have a pension or source of retirement funds other than savings?
If so, you won't need to save quite as much. Factor this into your calculation.

5. Do you plan to withdraw from your nest egg or simply live off the interest?
If you choose the latter, you'll either need to have a bigger nest egg, or simply need to draw less from your existing nest egg. For example, if you could generate a 5 percent return from a $300,000 nest egg, you would be able to draw $15,000 per year from interest alone. However, you could draw $20,000 a year instead but you would be initially drawing $5,000 from principal the first year and progressively more during each subsequent year.

6. Will your medical insurance change?
Medical costs are rising, and rising fast. And you can likely count on spending more on medical expenses in retirement than pre-retirment. Even as you become eligible for Medicare, you may want to purchase supplemental insurance. On top of that, as the cost of everyday medical expenses increases and new and new, more effective (and costly) treatments become available, you can count on much of that expense being passed on to you.

7. What type of accounts do you have your money in?
Do you have your money in a Roth IRA or a traditional IRA? Depending on which account type you chose, it will have a big impact on how much tax you are paying on your withdrawls. You probably already know that withdrawals from Roth IRAs are not taxed, wheras withdrawals from traditional IRAs are. So, at a 20% tax rate, for every $100,000 withdrawn from a Roth IRA, you would only withdraw $80,000 from a traditional IRA.

Don't have an IRA or need to roll over an old 401k?



Personal Finance Spreadsheet

Download the SmartFinancialPlanning.com Smart Personal Finance Spreadsheet. It can help you organize your financial life by giving you a snapshot of the current state of your finances, thus helping you make better decisions about how you spend, save and earn money.