By Sheryl Rowling
SAN DIEGO — Question: I want to plan ahead for retirement and want to know how much I need. I’ve heard numbers anywhere from $3 million to $5 million.
Answer: I am famous for giving 2 answers and this time is no exception. Before giving any answer, please know that it is not as simple as coming up with “a number.”
Having said that, if you want a rule of thumb, you must first figure out how much money you will need per year in retirement. Then, you can calculate a savings goal based on a “safe withdrawal rate.” The safe withdrawal rate is a percentage hotly debated by financial advisors. When double digit market returns were the norm, many advisors set the safe withdrawal rate at 5%. With expected returns lowered, the safe withdrawal rate has been calculated at anywhere from 3% to 4.5%. So, let’s say you determine your annual cash flow needs at $100,000. If you assume that 4% is a safe withdrawal rate, then you need $2,500,000.
Now, for the second answer. As I said earlier, it is not as simple as that. There are many factors that can influence your ability to retire.
- Is your savings pre-tax (in an IRA) or after-tax (in a taxable investment account)?
- When will Social Security benefits begin and in what amount?
- When will your mortgage be paid off?
- What if you need long-term care or have significant medical expenses?
- What is your life expectancy?
These are just a few areas to consider.
These days, people dream of retiring early. Yet, lifespans are increasing. Retiring young means you have fewer years to accumulate savings and more years of relying on those savings. Even working one extra year makes a huge difference; you’ll have one more year of savings and one less year of retirement – a double benefit!
The bottom line is that retirement planning takes planning! And, I recommend seeking the advice of a fee-only financial planner for help. A good resource is the National Association of Financial Planners at www.napfa.org.
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Editor’s Note: Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com