Calculating The Real Retirement Number
The "million dollar" question many of those preparing for retirement ask themselves is simply stated but not necessarily easy to answer - "how much money do I need to save to secure a comfortable retirement?" In some circles, this is referred to as "the number" - that magical figure that tells pre-retirees how prepared they may be.
A recent survey from Ameriprise Financial found that working Americans ages 50 to 70 with at least $100,000 in investable assets estimated that what they needed to comfortably retire was, on average, $930,000.*
But what does that number really mean? How important is it? What assumptions must you make to arrive at a number - and how many rapidly changing factors impact your number? Preparing for retirement is about much more than arriving at a number, but some calculation is necessary.
Calculate Your Retirement Expenses: When determining how much you'll need to save for retirement, it's helpful to think in terms of how much income you'll need to withdraw to cover expenses. But projecting future spending is an inexact science at best. Some expenses might go away (mortgage, FICA taxes, retirement plan contributions), but you may also have more time and energy to spend money on the things you need and want to do in retirement. There are also expenses that could greatly increase in retirement like medical costs.
Using your current spending habits as a starting point, draw up a realistic list of anticipated living costs in retirement. There are two primary categories to review in this regard:
Essential Expenses: These are the required costs associated with daily living - food, shelter, utilities, transportation, insurance (health, life, long-term care) and taxes - that most likely will persist throughout retirement.
Lifestyle Expenses: This is the "fun" part of retirement - interests that you want to pursue such as golfing, travel, owning a vacation property or starting a business. To make these lifestyle choices a reality, enough money needs to be in place to finance them. But separating out lifestyle expenses from required expenses can help you prioritize using funds from your nest egg too quickly and jeopardizing your long-term financial security. Note that spending on lifestyle needs can be adjusted as needed throughout retirement, as these are considered discretionary expenses.
Match Assets To Expenses: Rather than trying to assess whether a single lump sum amount is sufficient to meet income needs in retirement, a more practical approach may be to match specific assets (or sources of income) to various expenses.
The highest priority is the essential expenses category. Your goal should be to enter retirement with a virtual guarantee that required living costs are going to be met without interruption no matter how long you live. There are two clear sources of guaranteed income for retirement: Social Security and a defined benefit plan - when available. Of course if you're still far from retirement, Social Security shouldn't necessarily be viewed as a long-term guaranteed source of income due to potential changes as budget discussions unfold in Washington. If these income sources don't produce enough income to meet required expenses over time, additional income could be generated in another way such as an annuity providing a guaranteed income stream. Note that using this approach, future income is not subject to the variability of the markets 1 .
Your remaining available assets can be used to fund lifestyle expenses. You may choose to invest this money more actively with a strategy of drawing down assets over time using a sustainable withdrawal rate.
A true number may be elusive, but using this process, you may have a better sense of what your ultimate savings goal is. It may be useful to set multiple goals - or "numbers" - to reach enough to cover essential expenses and then lifestyle expenses. Beyond these goals, you might also consider the amount you'll need to cover unexpected expenses in retirement and to leave a legacy.
Planning financially for retirement can be complex. Taking the appropriate steps to calculate your retirement income needs is a great first step, but with an economic and political environment that is constantly evolving, it can become even more complicated as you near retirement. Consider working with a financial professional who can help you work toward your short- and long-term goals.
* The Retirement Check-In® survey was created by Ameriprise Financial utilizing survey responses from 1,000 employed Americans ages 50-70. All respondents have investable assets of at least $100,000 (including employer retirement plans, but not real estate) and are planning to retire at some point. The survey was commissioned by Ameriprise Financial, Inc. and conducted via telephone interviews by Koski research from October 31- November 14, 2012. The survey was conducted among a targeted sample of households. Cell phones were approximately 25 percent of the sample. The margin of error is +/- 3 percentage points.
1 However, inflation risk may remain, depending to some extent on the features of the specific annuity.
Annuities are not government or FDIC insured. All guarantees are based solely on the continued claims-paying ability of the issuing company.
Ameriprise Financial cannot guarantee future financial results.
Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.
Rocco is a Private Wealth Advisor with Ameriprise Financial Services, Inc. in Southampton, NY. He specializes in fee-based financial planning and asset management strategies and has been in practice for over 13 years. Advisors is licensed/registered to do business with U.S. residents only in the states of NY, NJ, TX, MA, PA, NC, NH, UT, NV, CA, NM, WA, VT, MS, MD, RI, FL, MO, SC, GA, MN, CT, AZ. Ameriprise Financial Services Inc., and its representatives do not provide tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation. Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. www.roccocarriero.com