As outlined in my recent Safe Withdrawal Rate post, answering the “How much do I need to retire?” question is critically important for anyone who wants to retire some day.
An analytical, numbers based approach is the only way to do it right. However, it seems as though most people have their own take on what that number is, without any basis in reality. SWR is a little-known personal finance treasure, so most people just make up predictions, blindly pulling numbers from thin air as they go along.
And if you look around, what you see is that there’s an interesting disassociation going on with retirement savings.
On one hand, average retirement savings are abysmal. 54% of workers in the U.S. have less than $25,000 in total savings and investments. People consistently put off savings to a later date. And this, of course, kills the ability for compound interest to do its magic.
On the other hand, most people grossly over-inflate how much they actually need to retire.
That was very apparent in a recent article where the New York Times interviewed workers from all over the country and asked them the all-important “How much would you need to retire?” question. The answers were:
From a 32-year-old tour guide:
“Twenty million dollars. That’s how much Julien Mellon needs to live the life he wants. With that kind of cash, Mr. Mellon could buy a “beautiful” home with enough left over to spend $100,000 a year (“in 2017 dollars”) until the day he dies.”
From the owner of a small skin care company:
“Twenty million would allow her to put her 17-year-old daughter through college, “give to philanthropy — especially women’s and children’s causes — start another company, and travel as part of work combined with personal pursuits.”
From a 46 year-old, single stay-at-home mother:
“Enough” is somewhere between $8 million and $10 million, so she could give her daughter “the best of everything,” as she put it: “Private school, college, money for an advanced degree at an Ivy League university, two homes, unlimited vacations. Retirement. Cars, gas, food, shelter, extras. I’d also like to make sure my mom is set for life not having to worry about money.”
From a 51-year old writer and teacher:
“$65 million… We’d travel cheap and dirty, with immersion in mind… We have a half mil in the bank, and I panic all the time about not having enough”
From a media personality and brand strategist in New York:
“A monthly stipend of $10,000 for the rest of her life. She’d like a minimum of $250,000 in retirement income on top of that, which would continue to appreciate yearly.”
(In other words, $370,000 a year, indefinitely).
Other respondents answers included:
- $5 million (61 year-old)
- $6 million (47 year-old)
- $10 million (50 year-old)
- $6 million (50 year-old)
What the…
Nothing really shocks me in the world of personal finance anymore, but this article shook me to the core.
It tells me 2 key things – neither of which are good:
- Most people are grossly over-estimating how much they would need to retire happy and comfortably OR require way too much spending to retire happy and comfortably.
- Most will never get close to the amount they think they need and either give up saving entirely or will work far beyond an age that they need to (and will be too old to enjoy a retirement).
Everyone spends at different levels – but nobody needs to spend $370K a year in order to have an awesome retirement. And we certainly don’t need $2 million a year for the next 30 years (without even taking investment gains into account) to travel “cheap and dirty”.
Let’s apply the principles learned in that post on safe withdrawal rate to explain.
My wife and I spend right around $25K per year. For that amount, we enjoy delicious organic food and all the wine/beer we could reasonably consume, multiple vacations each year, a nice home and car, 3 pets, more entertainment than we can reasonably consume, non-embarrassing clothing (I hope), multiple nice bikes each, 2nd degrees, and so on.
For the ripe sum of $1 million, we could theoretically live on $30,000/year (and have $5K a year to spare) at a very conservative 3% safe withdrawal rate. Indefinitely.
Even if for some unforeseen reason our expenses doubled, we would only need $2 million to live on $60,000/year at the same 3% safe withdrawal rate.
But $20 million? That is what you’d need to cover $600,000 in expenses every year.
$65 million? $1.95 million a year.
Imagine how much your entire perspective on life and work would change if you were convinced that you had to reach those unattainable numbers. The disassociation creates a massive gap that can’t be overcome and could leave you hopeless – throwing in the towel completely on saving for retirement. It could also lead you to making poor life decisions. There are very real consequences here.
Look – most of us slave away 40-50+ hours a week for decades in jobs that we don’t love (or even like) to make money to afford a comfortable lifestyle. Why in the world wouldn’t we spend a few minutes to figure out how much we would realistically need to afford a comfortable lifestyle, how to reduce that number, and how to get to that number?
Insanity.
There was one standout in the NYT article – a 49 year-old real estate investor and landlord who said she’d need $36,000 a year to feel secure.
“I’m not interested in traveling; I’m interested in creating paradise at home, Candyland. I’m still driving the ’99 Ford Escort wagon I bought for $3,200 cash in 2004. But sometimes it sits in my driveway for a week and I just ride my bike around. With just a bit more, I’d be able to pay my bills, contribute to my I.R.A. and have some left over for home improvements.”
There’s a person who gets it. And she is the only one of those interviewed who is seemingly content and at peace.
So… how much do you think you realistically need to retire, and why?
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GE,
I really enjoyed the past couple articles on retirement/SWR. One question I have is how inflation plays into things? Also, if I have traditional retirement accounts then I would need to factor in taxes too, correct?
My wife and I are thoroughly impressed by your low living expenses, we are closer to $50k a year and feel like we are already pretty minimalist. I’m using $100k as my retirement withdrawal to account for taxes, inflation and a general factor of safety. That puts me around $3 million for retirement, which seems attainable. Thanks for the peace of mind!
Thanks, Tom.
Inflation doesn’t play into SWR, because the assumption is that you will be earning more than inflation + then some to cover inflation and withdrawals. For example, if you earn an average of 7%/year and inflation is at 2%, you have 5% to cover withdrawals.
Taxes is a much more difficult because everyone’s situation is different here (% of assets that are pre or post tax). The less you need to withdraw, the lower your taxes will be. For me, for example, if I earned $30K/year and half of it was not yet taxed, my effective tax rate would be 10% and I’d probably recoup all of that with deductions/credits. So it is almost zero factor. The more income you need in retirement, the more your taxes will be.
I’ll also chime in. The studies on the SWR assume that you will increase your spending with inflation each year. So, inflation is already taken into account.
This is a topic that is of huge interest to me. My main goal is to gain financial freedom and essentially there are two ways to achieve this:
1.) Increase the amount in your retirement fund
2.) Reduce the amount you expect to spend in retirement
The first one is relatively straightforward, the more you save the better. The second one however takes a shift in mentality, learning to be happy with less. There are a whole bunch of things that make me happy that aren’t related in any way to massive amounts of material wealth and if you learn to leave these things behind, your magic retirement number can reduce significantly.
I created an online calculator that calculates the amount you need to retire based on how much you want to spend and your withdrawal rate (essentially how much risk you want to take on):
http://overbreakeven.com/calculate/financial-freedom-calculator/
It averages actual S&P 500 and US Treasury bond returns over 80+ years (very common investment vehicles for any retirement portfolio) and shows you how much you would need to save any particular time. I think it’s a useful tool to ballpark how much you might need given different variables.
Of course, history is not a roadmap for the future, so take it with a grain of salt. Unfortunately however, history is all we’ve got.
Those were some interesting responses. I never knew people thought they needed so much to retire. It might be all of the celebrity worship that goes on as well. People think you need that kind of money to be happy.
You’re right it’s all about running the numbers.
Thanks for the link to article. Just amazing how divorced from reality some of the people are. I got the sense “retirement” and dream spending level somehow got mixed up. Great post!
Agreed. It seemed like people were answering, “What would you do if you won the lottery, and how much would you spend?”
I retired one year ago. I did some things right, but not everything right. I only have $300,000 in my IRA. But, our beautiful home, worth $350,000, is paid for. We have no debt.
Our monthly budget is right around $2,500 per month. I have social security income of $2,511/mo plus a small pension of $649/mo for a total of $3,120 per month. It gets better in 3 years – my wife will start drawing one half of my social security amount, or about $1,256/mo. Also, at that time, I will start my Required Minimum Distributions from my $300,000 IRA (which I am not touching at the present time). That should add another $1,000/mo income. We went to Italy for 2 weeks last year, and are going to Paris for 2 weeks this June. We want for nothing.
Out of the need for something to do, I recently have started driving Uber about 25-30 hours a week. I’m making about $300/week. It’s not taxable at all due to 53.5 cents per mile mileage deduction the IRS allows – covers pretty much all my income. I’m using a fully depreciated 113,000 mile car for this purpose. Also, I can make about $17,000 a year additional income before any is taxable. This is due to complicated tax rules involving how much of my social security income is taxable.
All in all, we are saving money in retirement, and in 3 years will be saving quite a bit more. The better it gets, the better it gets!
There’s nothing to be scared of about retirement. It is terrific! And – there is no rule that you can’t attract more money, for example, by taking a part time job. I have friends who work for Enterprise Rentacar for 20 hours a week, or relocate cars part time, etc.
Kenneth, sounds like you did a lot right. Nothing in your story says you did anything “not right” because you are doing quite well it appears. I’m guessing you had some bumps in the road and could have more saved. That’s what happened to me. I had more in my 401K 10 years ago than I do now. The recession was a killer for me, but at 51 now, my retirement plan sounds a lot like yours. Retire at 59/60, use savings/investments until SS at 62 that will pay for the basic living expenses, then wife kicks in 2 years later. The 401K is gravy for travel and whatever else we want to do. House will be paid off in 4 years also. I also love the Uber idea for part time work. Thanks for sharing your story. It gave me some confidence it will all work out.
Thanks, Mark!
I made $406.10 this week for 28 hours of Ubering. I’m getting better at it, and enjoying it!
At 32 y.o. today, I figure we can comfortably live on today’s value of $25k in 30 years (~$81k w/inflation). I calculated out our number as $1.7 million with a 5% annual withdrawal rate in retirement. As an engineer, I probably have way too many safety factors built in, but from where we are at now, my wife and I only ‘need’ to save $7,500 annually to hit this number. Definitely do-able and hopefully much much earlier than 30 years from now.
No surprise on the figures that you presented. If one asks each one of these people what they spend monthly on food, transportation, communications, insurance, utilities and entertainment, they would have no clue. The only figure they would probably know is the rent or mortgage payment. If they don’t know their spending, how on earth could they possible know an accurate figure for a retirement nest egg? The bottom line, most people don’t have a plan because there is no leverage to develop a plan until a major financial event falls upon them, like a sudden job loss.
There’s one crucial piece missing from the survey. Did anyone ask the people surveyed what they are doing about accumulating the money that they want to retire with? Did the people surveyed come to this realization themselves?
Excellent post, my friend. Mrs Groovy and I retired right after we saved 30 times our annual living expenses. And because I’m fortunate to have a mini pension, we can live very well on a 2 percent withdrawal rate. Until I learned retirement math, though, I too thought I needed millions. Meh. If I hadn’t found out, I would have been working until I was 70.
Thanks for a great read! It’s crazy how much people overestimate the amount they think they need in retirement. That’s why I’m a firm believer in budgeting and saving nearly as much (or more) than you spend. Once you get comfortable spending less and saving more, you’ll find that you can still live a wonderful life on a fraction of the cost. And that will go such a long way in retirement.
I make less than $100,000/year now, so I figure that’s the high end of my estimate per year, to cover travel and healthcare. Once taxes are taken out, my 401k contribution etc, plus what I put in savings I could probably make it on $30,000-ish (not counting the unknown of heath care cost). My thoughts are FI with a bit of a job, enough to offset or be eligible for health coverage.
I also figure if I won $1 million in the lottery, while I spend $100,000 one year, the rest is making money, so I could make it last a long time. :)
Those estimates are comically over-inflated! Are these folks planning on purchasing a new Lambo in cash each year in retirement? Or just buy a few large islands in the Caribbean?
What are these people doing, buying bottle service all the time? Realistically I am probably over planned/funded in retirement (assuming a steady contribution rate at current levels, a moderate return (5%) for the next decade (and decreasing after that)). Now I have a secret weapon that most people don’t have, a retirement plan (which would more than cover my current expenses (minus the mortgage and the child care payments)), actually 2 of them (military reserve and federal employee retirements). I kid my wife that we have a lot of traveling to do in order to spend down the money we have saved.