how much

How Much Do You Need to Retire?

The number one question we get from clients and friends at Keen Wealth is, “How much money do I need to retire?” But that’s not the question we help our clients answer when we’re working on their financial plans. Contrary to all the late-night TV and internet ads, there’s not some magic number to hit, no secret formula for combined savings, assets and investments that’s going to guarantee a secure retirement.

So, on today’s show, we work through our preferred version of our most common question, which is: “How much do you need to live on in retirement?” We also apply this question and our checklist-driven process to one listener’s scenario for an insightful example of what having enough to live on in retirement can look like.

 iTunes Between Now and Success   

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Determining How Much You Need to Live on in Retirement

Shifting from saving to spending.

After decades of disciplined saving and investing, some of our newly-retired clients struggle to transition out of that savings mindset into a reward mindset. Some of these folks have plenty of money saved and should have little fear of running out of money in retirement. Yet they may be stuck in savings mode and end up living much too conservatively in retirement, sacrificing not just their happiness, but in some cases, their comfort and health.

My Keen Wealth team doesn’t tell clients that they “need to start spending more,” or “should start spending more,” or anything like that. Instead, we try to give our clients “permission” to let go of some financial anxiety and stress and enjoy the rewarding life that their assets can provide.

Start with 75%.

A common number you’ll see floating around is that retirees only need 75% of their pre-retirement income. That’s a good starting point, but it’s an imperfect metric for a couple reasons.

First, is that 75% pretax or after-tax? For most folks, taxes go down in retirement. You most likely won’t be earning as much taxable income because you’re no longer drawing a salary, and since you’re not on anyone’s payroll anymore, you won’t be paying FICA taxes.

Bill Keen: We can help you create a financial plan with personalized scenarios to help you determine how much you’ll need to live on in retirement.

Second, 75% is a hard number that anticipates your life, your ROI, and your withdrawal rates are going to progress in a straight line. The markets, and retirement, just don’t work like that. Volatility will affect your savings, investments, and withdrawal rate. You might plan to spend more early in retirement for travel, relocation, and hobbies, and then less as you settle into your golden years. An unexpected health problem or home repair might create a major expense.

So, take that 75% figure with a grain of salt. However, if you’ve been working with a fiduciary advisor and following a financial plan, it is true that you probably won’t need as much money to live off of in retirement. Your taxes will go down. Your daily transportation expenses will go down because you’re no longer commuting to work or shuttling kids around. Once you transition to Medicare your monthly health care premiums will probably be lower. Professional expenses like office wear will stop. And your retirement savings contributions will stop because … well, because you’re retired! It’s time to stop saving and start enjoying!

All that adds up to – roughly – a 25% reduction in your expenses.

Make a spending plan.

But the key word here is “roughly.” Just saying, “I’m going to spend 25% less than I used to” is not a good way to think about how much you need to live on in retirement!

No two retirements are the same. Some retirees travel constantly. Some retire to the backyard garden. Some retirees sell the family home and move out of state. Some retirees keep earning via part-time jobs or new businesses they start.

Once you and your fiduciary advisor have figured out what your retirement income and withdrawal rates will look like, you need to do something that you might never have done before: make a spending plan. This is especially critical if you’re moving out of state. The tax situation and cost of living in your new state of residence might be very different than where you live now. You’ll also need to make sure you select Medicare plans that get you the coverage you and your spouse need in your new home, and account for any additional medical expenses like specialists or prescription drug coverage.

Housing costs, health care premiums, utilities, subscriptions, vehicles, groceries, entertainment – get it all down on paper. Sure, the final numbers will probably be less than your expenses while working. But figuring out what you need to cover your essential living expenses will bring you some peace of mind if you’re worried about running out of money. Budgeting will also give you a more realistic idea of what you can afford to spend on “reward” items like that dream vacation you’ve always wanted.

Plan for the long run.

As mentioned above, most folks find that their retirement goes through phases: The Go-Go Years, the Slow-Go Years, and the No-Go years. At Keen Wealth, we want to make sure that our clients have the resources they need to enjoy each phase of their retirement. We want to see our new retirees getting out in the world, trying new things, and seeing new places during the Go-Go Years. And as they start to slow down, we want to make sure our clients are comfortable, well cared for, and satisfied with their legacy planning.

No, I can’t give you a one-size-fits-all number or percentage that’s going to make that happen for you. But my team at Keen Wealth can do something better: create a financial plan with personalized scenarios to help you answer your retirement questions.

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Got a question or comment? Email it to me and we’ll get back to you or call our office at (913) 624-1841. 

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

Keen Wealth Advisors is a Registered Investment Adviser. Nothing within this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Keen Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed here. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.  

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