This isn’t just important for individuals who are close to retirement, but also important for those who are younger, like millennials. The sooner you can dial in how much you need to retire and reach your financial goals, the greater the odds you’ll be successful to reach them.
Investors are constantly given conflicting pieces of advice, and how much they should have saved by certain ages or based on income. It’s best to figure out the numbers based on your specific situation as opposed to relying on general information being thrown around on the internet.
The best way to start is by dialing in your lifestyle and financial goals. How do you want to live your retirement years? Do you want to travel the world or simplify and downsize? Do you expect to spend more or less? When do you want to retire?
What other financial goals or major financial expenses do you expect in the future? How much do you expect these things to cost?
After working through your lifestyle goals and other major financial expenses, you can start to figure out what your living expenses might be during retirement. Many experts say you can expect to need 80% of your current annual income to cover your retirement expenses per year. Sometimes this is accurate, but not always, and is better to get the numbers dialed in for your situation.
Let’s say that you figured out you will need $75,000 per year to cover your retirement lifestyle. This would include basic living expenses, travel, healthcare and miscellaneous expenses like gifts and memberships.
If your social security income is expected to be $30,000 per year, this means you need to come up with $45,000 of supplemental income to fill the gap. Typically, this comes from your retirement savings accounts like a 401(k) or IRA. You can figure out what your social security income will be by visiting SSA.gov.
To produce a $45,000 income stream per year from a retirement account, your total balance would need to be around $800,000 - $1,000,000. This is calculated by using a 5% distribution rate for example, $45,000 equals 5% of $900,000.
Keep in mind this is a very general starting point. Depending on how your retirement accounts are invested and how much they are growing with interest, would depend on how much you should distribute annually. You should also consider your probability of success by running a Monte Carlo report. This type of report can be produced by your financial advisor or financial planner.
A Monte Carlo report takes the guesswork out of most of this, and shows you a solid number based on probability and randomly generated scenarios. Typically, we like our clients to have at least an 80% success rate when running retirement projections using a monte carlo report. This means that 80% of the trial runs resulted in them achieving their goals, and 20% of the runs resulted in them not meeting their goals.
Summary: To determine how much income you'll need in retirement, you can start by figuring out your retirement lifestyle goals. The sooner you retire, the more you’ll need to save. Your retirement number also depends on how your investment portfolio is allocated and how it is projected to grow.
Trent Grzegorczyk is the founder and principal of MICAPITAL, a registered investment advisor. Trent works with business owners, professionals, and high-net-worth individuals. Over the past 9 plus years, he and his colleagues have advised on over $3 billion in client assets. Trent enjoys cross country cycling, traveling, hiking, and resides in Traverse City, Michigan with his wife Alayna.