Almost everyone has wondered, or will wonder, about this question as they progress through their careers and, especially, as they approach retirement. After working most of their lives, this is understandably a million (or multi-million) dollar question that weighs on people’s minds as they prepare to spend more of their time finally doing exactly what they want.
The first step to answering this question is to determine what you want to do during retirement – travel, volunteer, etc. This will lead you to the financial adviser version of the question: How much will you need to spend in retirement? It requires some estimates – but once you have this piece, you’re ready to determine how much money you need to make your retirement goals happen.
Here are the key steps:
1.) Estimate Your Expected Retirement Budget
Begin by examining what you currently spend each month. Think about what expenses will go up, down, or go away altogether once you hit retirement age. Things like your grocery budget might not change much, but the mortgage may be paid off, and travel expenses may go up. Again, this will be an estimate – but it will give you a good sense of what you can expect to spend each month. Multiply that by twelve and you have a good idea of your projected annual income needs.
2.) Determine Your Social Security Benefits
Next, determine what you anticipate receiving in Social Security benefit payments each month in retirement? No matter how much or little it is, that’s money you already set aside – via Social Security tax during your working years. Now it’s coming back to you. The Social Security Administration advises the annual benefit will replace ~40% of your pre-retirement income – but pulling your personal benefit statement offline can give you a better idea of what you can expect for your own budget. Make sure you’re multiplying any monthly benefit by twelve, and that is what you should estimate receiving from Social Security each year.
3.) Determine Your Annual Income Gap
Finally, if Social Security more than covers what you plan to spend in retirement – great! You can stop here. However, if there is a gap between your Expected Retirement Budget and your Social Security benefit, that’s money you must come up with from other sources. Frequently this gap is filled by assets you accumulated in other retirement accounts during your working years like 401(k)s, 403(b)s, Traditional IRAs, Roth IRAs, etc. Projecting how large these accounts must be to cover your annual income gap (factoring in potential future rates-of-return, inflation, and withdrawals) takes some calculating.
Fortunately, MCM is well suited to helping you determine just how large these retirement savings need to be. So, when you get to this point, don’t despair. Instead, give us a call. We can help take the guesswork out of retirement planning. After all, retirement is a milestone to be celebrated. Worrying about it doesn’t have to be part of the picture.