How Much Money Do I Need to Retire?

One of the most common questions from people approaching their retirement age is, “Did I save enough?” Although it would be great if there was a quick answer to this question, in reality there are so many factors that go into with the retirement investing process. Relying on social security alone is no longer enough for most people who retire. Here are the major factors to consider when figuring out your retirement savings goal. Tompkins is here to help you every step of the way.

Who You Are Affects Your Retirement Fund

Your retirement nest egg will depend on the type of life you want to live as a retiree. Your living expenses, life expectancy and lifestyle choices all play a role in the amount you should save for retirement.

Calculate Living Expenses

• How much are your living expenses?
• Do you envision living in a modest home or are you looking forward to spending weekends enjoying the beautiful breeze on your yacht?

Depending on what your current expenses and living conditions are, you will at least need to save enough to cover them in retirement. Some experts say you will need 70-80% of your current income once you reach your retirement age. For example, if you currently make $75,000 a year while you’re working, aim for being able to withdraw $56,250 from your retirement savings each year (or 75% of your current income).

Estimate Life Expectancy

Next, you’ll want to estimate how long you will likely live. Based on your current health and advancements in medicine, you may be lucky enough to live well into your 90s.

The Social Security Administration found that on average, men reaching the age of 65 today can expect to live until they are 84.3. And, the average life expectancy for women aged 65 today is 86.7. They also found that 25% of adults aged 65 today will live past 90, and 10% will make it to age 95. Use their Life Expectancy Calculator to estimate your life expectancy. Once you have a baseline for your estimated life expectancy, multiply the annual amount needed by the number of years you don’t plan to be working to get a high-level estimate of how much you should save for retirement. 

Do you believe your current retirement savings will last you that long? If your family history indicates that you are more likely to make it to 95 rather than 75, it’s very wise to consider saving more than the average person should.

Lifestyle Choices in Retirement

When developing a retirement savings strategy, budget for items outside normal living expenses that will stay with you during retirement. For example, perhaps you will no longer pay for your child’s Irish step dancing lessons as a retiree, but you will continue your membership at your local country club. If that is the case, include that along with other expenses like traveling, or eating out.

To see a typical retirement budget and information on how much you should plan to retire in New York, access our retirement portal.

Rules of Thumb for Retirement Savings

One way to estimate what you will need to save for retirement is by using Tompkins retirement calculator. However, there are also a couple rules that you can use to estimate how much you should save for retirement.

• Multiply By 25 Rule: The multiply by 25 rule estimates how much money you will need in your retirement nest egg and assumes you will live 25 years in retirement. To use this rule, first determine the amount of money you want to withdraw from your retirement savings annually. If you have annual living expenses of $40,000 and $10,000 in lifestyle choice expenses, you would need $50,000 per year. Then multiply $50,000 by 25, resulting in $1.25 million of required savings at retirement.

• 4% Rule: Alternatively, the 4% rule estimates how much money you can safely withdraw from your nest egg per year, once you reach your retirement age. Let’s say you saved $1.25 million for retirement. You should be safe to withdraw 4% of that amount, $50,000. ($1,250,000 X .04 = $50,000)

Another factor to consider and account for is inflation. For year two, using a 3% inflation rate, multiply 3% by the $50,000 (1.03 X $50,000 = $51,500). You could safely spend this amount in year two of retirement. You would then need to perform this calculation at the start of every new year.

Creating a Solid Retirement Plan

One thing to keep in mind with rules of thumb is they aren’t a replacement for a sound financial plan or retirement savings strategy. These are general guidelines to give you a high-level estimate that don’t typically account for all of the nuances of life like taxes and personal factors. While there no guarantees in life, saving based on these methods will at least set you in the right direction as you head into your golden years.

If you’d like to speak with an expert at Tompkins Financial Advisors, please contact us to set up an appointment. We specialize in financial wellness and wealth management and have served New York and Pennsylvania for over 180 years.