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Retirement planning can be a daunting task, especially when it comes to determining how much you need to save to live comfortably. When I was growing up, saving $1 million by retirement age was the financial goal for many people, as it was believed to be enough to ensure a comfortable retirement. 

Get your total assets to read nine digits, and that’s all you need for a healthy retirement. Think about it, if you have a $1 million retirement account that generates a comfortable and conservative 8% income every year. That’s enough to cover your living expenses and then some, right? I really thought this was going to be me the day I turned 65.

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After doing some quick math, I realized that having $1 million of assets may not be enough to sustain you throughout your retirement in today’s economic climate. Plus, I was learning from a generation that still had all three legs on the retirement stool: pensions, Social Security, and Savings to keep them afloat during their golden years.  

three legged planning model

They could stash money away while knowing that during their retirement, the company they worked for for decades would take care of them by supplementing their savings with a pension. And Social security would also kick in to pay out a certain amount every month, based on how much you paid in. Everything else would be your responsibility to pay out of your savings and retirement accounts.

Fast forward to 2022, the proliferation of small businesses and the gig economy has left many people without the benefit of a pension, forcing them to rely solely on their savings and Social Security. So now retirement looks a bit more like this for many people 50 and under.

three legged planning model illustration

Given the uncertain future of Social Security, it’s important to have two financial plans: one with and one without the program. If you can’t count on Social Security, you must focus on building up your retirement savings.

So I started thinking, “Is a million even enough to live comfortably during retirement?”

I quickly realized that that arbitrary one million dollars meant nothing. Let’s face it, determining how much you need to save is not a one-size-fits-all equation. Your retirement needs will depend on your annual expenses, including your daily necessities and your desired lifestyle. 

Someone that is single and lives a simple life in a rural town will be able to make $1,000,000 go a lot further during retirement than a married couple that lives in a 4,000 sq ft mansion, has six kids, and desires beautiful tropical island vacations at least twice a year. So before you can figure out what your total retirement assets need to be when you stop working, you must look at your annual expenses.

Know Your Household’s Annual Expenses

Although knowing your annual and monthly expenses can be intimidating, even embarrassing, it’s important not to be in the dark about your finances. But to get a handle on your annual expenses, it’s crucial to track every penny that you spend as a household. Include both fixed and variable expenses. Daycare, mortgage, real estate taxes, food, restaurants, subscriptions, utilities, repairs, gifts, clothing, vacations, gas, household expenses, pet expenses, and car loans. 

It’s really important to know which expenses will be around until the end of time and which expenses will fall off and won’t be a part of your annual expenditures when you reach retirement age.

Your home mortgage is a big piece of the puzzle that many assume will drop to zero when they’ve paid off their house. But that’s not actually true. While it’s true that the principal and interest will be gone when you own your house free and clear, you can guarantee that those property taxes and homeowners insurance expenses will be due every year. So if you escrow those expenses into your monthly mortgage payment, don’t count on your entire mortgage payment ever disappearing because you’ll still have expenses to pay on your very valuable asset.

Once you’ve gotten an estimate together of all expenses, you have a great baseline as to what you spend annually, at a minimum, to keep the same lifestyle as you have right now. 

What is that number for you? About $75,000, maybe $100,000? Now let’s think about how many years you plan to pay that much out, based on when you decide to retire and how long you expect to live.

Length of Retirement

Now that you have your approximate annual expenditures, you need to figure out how long you need those to last you. People are staying in the workforce longer, but they’re also living longer. 

If you retire at 50 and you plan to live until 85, you have 35 years of expenses to pay for with your retirement assets. But if you love what you do, plan to work until you’re 70, and plan to live until 85, that’s a lot less money you’ll need to save before your last day of work.

According to the U.S. Department of Labor, the average American spends about 20 years in retirement. So if you have no clue when you might stop working and how long you’ll be enjoying pickleball, you should start with 20 years as your estimate.

Now that you have your total approximate annual expenses and your approximate time in retirement, you know what your top line number needs to be, your total retirement assets. This is what your total retirement accounts need to show for you to live comfortably.*

So, what is considered a Retirement Asset if you can’t count on Social Security?

retirement planning

What Makes Up Your Retirement Assets?

Retirement accounts: the most common are 401(k)s, IRAs, and pension plans. Traditional IRAs, Roth IRAs, SIMPLE and SEP IRAs, and Solo 401(k)s all fit in this category. These accounts are likely invested in the markets and should generate income between now and retirement, but it’s good to know what those balances are now and what you’d like them to be when you retire.

Home equity: If you own your home, you may be able to use some of the equity in your home to cover expenses through a reverse mortgage or by selling your home and downsizing. The biggest problem with owning real estate is that it isn’t liquid. You can’t pay the grocery store or Best Buy with a piece of ownership in your house. So once you’ve paid off your house, technically, it’s part of your assets, but you can’t use it to cover monthly expenses. So many retirees sell their homes to cash out and buy something cheaper or take out home equity lines of credit and reverse mortgages to get some quick cash in their pockets. But taking on more debt creates another monthly payment for them.

Home equity can be deceiving and tricky, especially since it can often account for a large part of a family’s assets, not only the primary home but sometimes a rental or vacation home too. It’s awesome that you have a $400,000 house paid off and owned free and clear going into retirement, but unfortunately, that asset, in its current form, won’t be able to be used to pay for anything, and it’s going to cost you money to keep it up and running so that it maintains its value.

Savings accounts: This is everything else. Savings and checking accounts, individual brokerage accounts that aren’t within a retirement account, cash under the mattress, cryptocurrency, gold, silver and everything else you can think of.

Annuities: Annuities are insurance contracts that pay out a regular income, either for a specific period of time or for the rest of your life. They’re amazing if you have them, but they’re not right for everyone.

Other Considerations

Another reason why $1 million may not be enough for retirement is the increasing cost of healthcare. As we age, our healthcare expenses tend to increase, which can be significant. In the United States, the average retiree can expect to spend around $285,000 on healthcare expenses during retirement, according to a study by Fidelity. This figure does not include long-term care expenses, which can add even more to your retirement costs.

This is an astonishing amount of money. Over 20 years as the average time of retirement, that’s an additional $15,000 per year, MORE than you’re spending now. And if you think healthcare is expensive now, wait until you see what they’ll charge us in 30 years for a doctor’s visit in the Metaverse.

This leads me to one of my other two considerations, expenses that we don’t even know about yet. Think about the insane fees and expenses that we’ll be paying in five to ten years that we can’t even fathom now. We’ll pay subscription fees to the car manufacturer every time we turn on the heated seats in our self-driving car, the drone that delivers our meals, and the bank for allowing us to use our own accounts. 

And lastly, do NOT forget to plan for the inflation rate. For example, if the inflation rate is 3% per year and you have $1 million saved for retirement, in 20 years, your $1 million will only have the purchasing power of $700,000 due to inflation. Is that a gut punch or what? Inflation in 2021 and 2022 alone has caused huge amounts of stress to retirees on fixed incomes because they did everything they could to plan, but what they were bringing home wasn’t enough anymore to cover all of their bills.

I think it’s important to keep inflation in the back of your mind when you’re coming up with an approximate number that you’ll need to reach to be able to retire because it’s completely out of your control. There is nothing you can do to stop it, so you need to ensure that you have a cushion enough to feel comfortable even if the markets decline and the dollar loses its value.

Whatever your annual expenses are today, with a mortgage payment, it might be pretty close to what you’re paying per year during retirement, even after paying off the house, because of the increased medical costs and inflation affecting buying power.

Suggestions to Reach Your Goal

  1. Start saving as early as possible: The earlier you start saving for retirement, the more time your money has to grow through compound interest.
  2. Contribute to a retirement account: Employer-sponsored retirement accounts, such as 401(k)s and IRAs, can help you save for retirement by allowing you to contribute a portion of your income on a tax-deferred basis.
  3. Increase your savings rate: Aim to save at least 15% of your income for retirement if you can save more, even better.
  4. Create a budget: Create a budget to help you better understand your income and expenses and make adjustments to save more for retirement.
  5. Consider working longer: Working longer can give you more time to save for retirement and also increase your Social Security benefits if they’re still around.

You can create an account on SSA.gov to get a statement about your Social Security account. You can also project what you’ll make until retirement age and see what benefits you’ll get when you retire at 62, 67, and 70. The monthly amounts they’ll pay out are quite different, and when you get closer to the decision, it’s worth playing the game of figuring out the best time to retire based on the increased monthly payouts.

The example below shows this individual’s monthly Social Security Benefits if they were to retire at age 62, 67, or 70.

retirement planning chart

Final Thoughts

We all work so hard day in and day out that we shouldn’t be under any more stress or pressure during our retirement years, especially if it’s preventable. Knowing what your monthly expenses are, in and of itself, is so important and eye-opening. But then use that information to figure out what you need to be able to retire comfortably. Figure out what that amount is with and without Social Security and then work towards hitting those numbers. 

It’s not going to happen overnight. Hopefully, you’re not planning on retiring tomorrow. Instead, just set small goals every year to hit. Stash money away, save where you can, but don’t waste money on things that don’t fulfill you because you’ll need that money later in life and wish you had it.

Retirement is going to be amazing, but it’s something you need to plan for your entire life, starting right now. I hope in retirement you’re as happy as these two!

young looking retired couple

*For the sake of the demonstration, we’re ignoring the earnings that these assets might create for you (investments will earn dividends, rental properties will earn rental income, etc.). The flip side of that is inflation and increased medical expenses, which we’ll address later. So, for now, let’s forget that these assets can increase in value during your retirement and generate revenue for you annually, which will soften the heavy cash outflow every year.

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