How Much do You Need?

​“How much money do I need to retire?” is a very common question I am asked. When I turn it back on the client I get varied responses but my favorite is, “I want just enough so that my last check bounces, and hopefully it’s made out to the IRS.” Sadly, some retirees spend money as if this is really their goal.
How much you need to retire is very personal and has a lot to do with how you live before retirement.  Some do just fine on a few thousand a month. Others live extravagant lives they would have difficulty giving up. So looking at today’s expenses is a great place to start.
A rule of thumb says you need 70% of your “working years” living expenses, but that is often a poor guideline. This rule assumes you won’t have kids or a house payment. The problem is that just because your kids become adults doesn’t mean they stop costing you money. Some of you readers know exactly what I mean.
Though many retirees don’t have a house payment, they often replace it with higher travel costs, medical needs, eating out, and grandkids. The truth is, retirees often spend as much, or even more than they spent when they were raising a family. So, the best rule of thumb is to ask what you want your retirement to look like and create an honest budget for it. When you come up with an annual amount, subtract your planned fixed income such as social security and pensions, and what’s left over is what you will have to save for.
If you can assemble a nest egg about 25 times bigger than the amount you need annually, you will be well on your way to a successful retirement. So, if your shortfall is $24,000 a year, then I would suggest $600,000 as a starting figure. The biggest unknown in retirement is how long you will live, otherwise bouncing your last check would be much easier.
Retirement is like planning a flight to a distant city. Planes are weight-limited, so you rarely fill up the tank like you do with a car. You only carry as much fuel as you need. My rule of thumb is to figure the amount to get to my destination, include a safety margin for winds and ATC diversions, and then add enough extra to stay in the air for at least another hour, just in case. Launa has never complained at seeing 30 gallons in the tank upon landing. Unfortunately, countless pilots have died from running out of fuel, with many of those accidents happening within sight of the runway.
The “bounced check” planning model is terrible in aviation and just as dangerous in retirement. When you plan your life’s financial journey, make sure you build in a generous safety margin for the unexpected, and if you get to your destination with some fuel left in the tanks, I promise your heirs will not complain.