What does it really take to retire? Well, the first question you really need to ask yourself is, When do I plan to retire? According to Gallup’s 2021 Economic and Personal Finance Survey, the average age of retirement is 62 years old. While this might feel far away, it is vital to think about the future since you still have to answer some additional questions to figure out how much you will need to retire comfortably.
- Do I want to retire at 62?
- Where do I want to retire?
- What do I want to do in retirement?
- What does my lifestyle look like after I retire?
- How will inflation affect my retirement saving?
Looking at retirement estimates, you will find a large range of suggestions. Anywhere from 4-10 million dollars to retire. Many other experts recommend 70%-90% of your current annual income. For the average earner, this would come out to roughly $36,400- $46,800 dollars per year or a total retirement savings of $1,092,000- $1,404,000 dollars.
So how much do you really need?
Well, it depends…on you.
The Rule of Thumb for Retirement
There are some basic rules of thumb based on William Benegen’s research. In 1994, William Benegen published a paper stating retirees should withdraw 4% of their assets annually and increase this rate each year by inflation and then rebalance annually, making your portfolio last you 30 years.
He created this rule by using historical data from the stock market (1926-1976) and focused on the market downturns in the 1930s and 1970s. He determined that even in unreasonable markets, there was no historical case in which a 4% annual withdrawal from your retirement accounts would exhaust your funds in less than 33 years.
Another easy way to simplify the math on this is that you will need 25x what you live on yearly in order to retire with enough to do a 4% yearly draw.
Let’s Break it Down
Now that we know this rule, let’s think about some of the expenses you need to plan for – including long and short-term goals.
How much money do you need to cover your regular expenses? Below are some of the most common expenses.
- Medical Premiums/Health care
- Planned Giving
Banking Rate released an article: What a comfortable retirement will cost you in each state. Take a look and see if this is what you expected for your state.
Considering a Change of Scenery in Retirement?
Now, what about living abroad? Here is an article that gives you all of the details you need to think about before retiring abroad. You can also go to Internationalliving.com to use their calculator to see suggested places you could live abroad with your budget based on the 50/30/20 rule.
The 50/30/20 rule is a budgeting method to help you break down your monthly after-tax income into three categories: 50% for needs, 30% for wants, and 20% for savings.
You must also know the tax implications of retiring abroad. Leaving the US does not exempt you from paying US taxes even if you move all your assets to a foreign country. If you receive income from part-time employment/ self-employment you may owe taxes in the US as well as the foreign country.
There is no one-size-fits-all answer for what you will need in retirement. Be thoughtful in your approach and think about your values when you’re curating the retirement that’s right for you.
If you’re looking to improve your financial literacy and outlook on your future finances, check out the 3rd Decade Financial Literacy Program here.