How Much Money Do I Need To Retire?
Contact Rolling 401k - 800-372-2647
Copyright 2010 Rollover 401k to Roth © All rights reserved.
How Much Money Do I Need to Retire?
Do you have a goal to retire in 10-15 years? Hopefully you’ve put some thought into this question: “How Much Money Do I Need To Retire?” Of course this is a very subjective question, because each person has different tastes and life style retirement goals. Another factor to consider is that Social Security at its current funding levels will become financial insolvent in 2017. Therefore, I recommend Social Security funds are not counted as part of your retirement funds. Another variable lurking out there is “Healthcare Costs.” With healthcare reform on the horizon it’s still too early to tell what impact it will have on Medicare? However, all signs seem to point the fact that Medicare funding by the Federal Government will less and less. This means that each individual will bare more of the costs associated with healthcare in retirement.
Here are some things to consider when determining how much you’ll need for retirement:
Income & Assets
Take stock of your income. Will you be receiving Social Security or a pension? Will you be working part-time, doing consulting work or turning your hobby into a business in retirement?
Have you saved into your 401k or built up other assets that can be used for retirement. According to a recent study by AARP, a safe withdrawal rate (or percentage you can safely withdraw from your principal without running out) is four percent. Most people don’t pull out a steady percentage, but typically will do an “as needed” approach. According to the study, If you have $500,000 saved up, you can safely withdraw $20,000 annually and not tap the principal.
Expenses & Liabilities
Income and assets are very important, but to me these are the bigger items to look at. Take inventory of your expenses and liabilities. Will you need to buy your own health insurance or will you protect against a possible need for assisted living or a chronic illness? Do you plan on traveling the U.S., buying that golf membership or spending money on a vacation home? These things will obviously dictate how much income you need?
Do you still owe on your mortgage and credit cards, or are you debt free? If you have no debt and a fairly simple lifestyle you will be able to retire on much less than if you want to travel the world and you already have all kinds of liabilities.
Short Answer and Simple Calculation
The short answer to the question, “How much money do I need to retire?” is “It depends”. Because every person and situation is different there are just no hard and fast rules to help determine what’s appropriate.
The simplest way to calculate how much you need is to add up all your sources of income and subtract out your planned expenses in retirement. If there is a shortage, you will need your savings to supplement. If the amount needed is greater than four percent, then you probably need to save more or push back your retirement date. If that amount is less than four percent then you have done a good job of minimizing expenses and maximizing your income and assets and your retirement picture looks much better.
Consider these general guidelines as a starting point. Every situation is different and unique. If you want to delve more in depth into this question of how much is needed, there are many great retirement calculators on the web that will also take inflation and your rates of return on your savings into consideration.
Healthcare Costs
Currently a large portion of a retired individual’s monthly Medicare expense is paid for by Uncle Sam. However, in the near future it seems evident that good old Uncle Sam is going to pay less and less of the monthly Medicare costs. Therefore, it is a good idea to plan on paying a larger portion of your Medicare costs. Currently Medicare costs about $100 a month per individual for a “Medicare Advantage” type plan. Basically Medicare Advantage is simply purchasing pre-bundled Medicare supplemental insurance. Medicare currently has many “gaps” in its coverage, and therefore it is necessary for a individual to purchase “supplemental Medicare insurance” to covers the gaps.
Uncle Sam has traditionally paid part A & B of the Medicare plan for retired seniors, and left retiree to purchase their own supplemental insurance. However, it looks as if some of that burden will be placed on America’s retirees in the near future. So as a rule of thumb I would say not only to budget for the $100 of Medicare Supplement insurance, but also budget for pay some of part A & B, which will most likely be another $100 a month.
Bottom Line
Save more, spend less, get rid of debt and live a fairly simple lifestyle and you will be headed down the right path.