How Much Money Do I Need to Retire?

There’s been lots of talk lately about what one needs in savings, investments and passive income in order to retire. Our blogging pal Cindy wrote last week on how she and her husband retired on well under a million dollars; the standard number by which many say retirement is possible.

Those wishing to retire early, however – or to retire to a life of luxury – may need quite a bit more than a million. How can you know what you need cash-wise in order to be ready for retirement? Here are a few questions you can ask yourself in order to determine the answer.

How Many Years of Retirement Life Do I Need to Save for?

This is one of the main questions you’ll need to answer in order to figure out how much money you’ll need to retire. How many years do you plan on supporting yourself with your retirement funds? FYI, you’re better off planning for more years than fewer. Advancing technology means that lifespans will likely increase, provided we don’t diminish our health with processed food and sugar consumption.

Think liberally when planning how many years of retirement you’ll need to save for, and plan on a high number, like age 90, as you plan. This means that if you plan on retiring at 40, you’ll need fifty years of income to live off of.

What Type of Lifestyle Do I Want to Live in Retirement?

How much money you’ll need in retirement also depends largely on what type of lifestyle you want to live after you retire. The first step to determining this is to write down (with your spouse if you’re married) what your retired life will look like. What kinds of cars do you want to drive? Where will you live and what will be your housing expenses? What will you do for entertainment? Will you travel? Spend liberally on dining out and clothing? Put megaloads of money into charity work?

Those wanting to live a lavish life post-retirement will obviously need more money than those who are satisfied with money for the basics. The same goes for those who want to retire at 40 compared to those who want to wait until age 60.

Figure out your plan, and then write down some budget numbers that will help you see how much your plan costs. This will help you with the next part of your retirement planning……

How Much Money Will I Need Each Year to Live On?

After you retire you’ll need money for basic expenses. And you’ll need money for whatever the lifestyle plan you created in the last step. One huge help as you plan for post-retirement expenses will be to have all debt paid off before you retire. The less debt you have, the less money you’ll need to retire. This includes mortgage debt. If you plan on staying in your current house, develop a plan that will have you paying off your mortgage by the time you retire. If not, consider looking into homes and areas to live that will allow you to buy or build debt free.

When planning your post-retirement budget, it’s important to be liberal too. Also, plan for occasional expenses such as car repairs, car purchases and home repairs. Think about every possible expense you could have and create a budget category for it. ย Don’t forget to include inflation in your calculations. Experts say inflation generally runs about 3% per year. That could add up over a twenty, thirty or forty year period so make sure to account for it as you budget for post-retirement expenses.

Don’t forget about the fact that you’ll likely be taxed on your post-retirement income as well. Unless you’ve got everything in Roth IRAs, make sure you are planning for some of your post-retirement income to go to pay for annual taxes.

What About Medical Expenses?

This is another huge area of discussion when it comes to retirement – early or otherwise. You need to have a plan to cover ever-rising medical costs in your post-retirement years.

If you live in a country where medical coverage is paid by the government, and you’re happy with the care you’re receiving, you may be good to go. However, if you live in a country where medical coverage is not paid for by the government, or if you’re not happy with the care you receive via the government, you’ll need to have a plan.

Ask questions and start doing your research. Do you qualify for post-retirement insurance coverage through your employer? Can you get onto a Medicare program? If so, how much will those benefits cost you and what are the deductibles? Experts say that most people can plan on dishing out over $200,000 in medical costs in their post-retirement years. If that seems like a realistic number to you, plan on adding that amount to your post-retirement savings fund.

Where Will I Live Post-Retirement?

We talked a little bit about this above, but housing is generally the largest part of one’s annual expenses. Have you determined where you’ll live after you retire and how much it will cost you? Don’t consider just the cost of the housing, but the cost for taxes, utilities and repairs as well. In some cases, renting may be more cost effective than owning. If you’ve got a reasonably priced 55+ apartment complex in your area that may be the way to go.

Many people also choose to move to lower cost areas after retirement, whether that be to a lower cost southern state or a lower cost country such as Belize. Where you live will also depend on what type of lifestyle you want post-retirement. If you plan on spending a lot of time with kids and grandkids, then you’ll want to live close to them and should figure out housing expenses accordingly.

Is My Current Savings Plan Conducive to My Retirement Goals?

Now that you have a decent idea of at what age you want to retire and how much money you’ll need to retire, you need to calculate whether or not your current savings and investment plan allows you to meet the goals you’ve set for retirement. By calculating how much money you’re currently setting aside, what a reasonable growth investment rate is and when you want to retire, you should be able to know whether or not you’ll have enough cash to retire when you want to retire.

How Can I Modify My Plan to Make it Fit in Line with My Goals?

If you’ve determined that your current savings plan isn’t going to allow you to retire when and how you want to, you need to modify your goals. That might mean doing one or more of several things, such as:

  • adjusting your savings rate to meet your goals
  • downsizing your home or other assets to increase cash flow
  • increasing income to meet your goals
  • looking for other avenues for additional income post retirement

Other income avenues could mean rental properties, dividend paying stocks or money from a passive income source such as an online business. For instance, if you’re going to be short $1,000 a month in income, you could consider taking some cash and buying a fixer upper rental property in an area that will net you $1k a month. Boom – automatic income increase for post-retirement years.

There are hundreds of blog sites that share how to make money to accommodate retirement expenses. This post from Retire by Forty shares a good number of links to other early retirement/retirement blogs.

If you’re willing to spend some time educating yourself and taking the steps you need to take, like Cindy and her husband did, you can find a way to retire, likely earlier than you thought. The earlier you can retire, the more time you can spend doing what you love.

What is your retirement dream? Are you on track with your goals to get there?ย 

15 comments on “How Much Money Do I Need to Retire?

  1. Love the advice here, Laurie! It’s important to evaluate each of the steps you list. There are so many variables to consider when it comes to retirement (and a lot of unknowns). I think it’s better to over-prepare a little.

    We have a plan, and we’ve evaluated each area. But some things are still up in the air. Will we continue to live in our current house/location? Will healthcare costs be higher than expected? Those two are the biggest questions for us. Healthcare is the one issue that will probably delay retirement for us. We recently discovered I have a pre-existing condition, so we don’t qualify for some plans and it will probably push our costs up. That said, this could happen to anyone at anytime, so it’s better to be prepared.

  2. Great advice Laurie. All about having a flexible plan. We have started to plan, but the unknown for us is where are three children will land. We have talked about relocating, but want to be central to them for visits, but find the best balance for the things we want to do. So until we get clearer on that I think weโ€™ll just focus on the savings.

  3. I am trying to live as healthy as I can and so is my husband. I say that because mounting health care costs, especially as one ages, are something that I hope we don’t end up having but you never know. All one can do is plan for the future, right? ๐Ÿ™‚

    1. Us too, Mackenzie. We figure the more preventative we do, hopefully the less our health care costs will be in retirement. Most of our family history stuff is preventable stuff, so we’re banking that living healthy will help us reduce health care costs.

  4. One thing that I’m finding is that it’s remarkable how the cost of living goes down as kids grow up. This shouldn’t be surprising – but it is. Two of our three no longer live at home, and it’s amazing how that impacts grocery bills. Our second will be graduating from university this summer, and we’ll no longer pay for her housing and living expenses. That will be $750 after-tax dollars more in our pockets per month. As long as parents know how to set boundaries on the amount of money they spend on their adult children, the cost of living goes way down once children become adults. If that extra money is put towards investments – and not blown – possibilities for retirement get a good shot in the arm.

    1. Wow! That can be an extra $750 toward the mortgage – yay!!!!!!!!!!! I love what you said about setting boundaries on spending money on adult children. It’s important not to enable; I see so many parents doing that.

  5. Interesting to hear from Ruth about the cost of living going down with grown kids. I know our kids are going to cost us more in the future than they do now–but only for a finite number of years. According to our current expenses we could retire in 12-15 years but I imagine a lot is going to change in that time. We’re young so we’re not sweating it!

  6. This is awesome advice, Laurie! Medical expenses are such a big item and it is so hard to estimate expenses years out with the constantly changing system int the US. We are aiming to achieve FI/RE in the next 5 years but what happens with our medical system will be a big determinant of if that is possible!

  7. We’ve been semi-retired for a couple of years…I work a seasonal job, Jon manages our rentals. We’ve been okay with medical costs through ACA, but future medical costs concern us a lot. There’s just so much uncertainty right now.

  8. Kids and Healthcare! At least one of those things eventually leaves the nest! It is true, a decent amount of money was freed up when the kids left home and got married.

    Health care is a concern for us as well. We have never had a company provided health care plan, after Obamacare the coverage costs became back breaking for us (and many like us). I have food allergies, which is considered a pre-existing condition. In the past, that would disqualify me for coverage. Costs were still reasonable at that point, so I could find coverage at a minor price increase,but I do wonder what might happen when some of the current healthcare rules are redacted.

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