By Melanie Hasty-Grant
The Million Dollar Question: Do you have enough money to retire?
It’s not a one size fits all answer. Do you really need $1 million to retire? Or is it $2 million for a retired couple? Or is it 10 times your current annual salary? All of these are nice, neat figures you might have heard. The bottom line is it boils down to what your expenses are and what your retirement income sources will be. The keys are to retire with as little debt as possible by paying off your mortgage, vehicle loans, and other debt such as boats and credit cards and to save as much as possible by contributing to retirement plans, savings, and other sources of income.
To get started, figure out approximately how much you currently spend on an annual basis. Don’t forget food, credit card bills, insurance, and vacations. Check your numbers against your current “bring home” pay.
If your expense numbers are significantly higher than your budget and you don’t save anything every month, you may have underestimated your actual expenses. It is very common for people to underestimate expenses and overestimate their investment returns. Surprisingly, when folks come in to my office and bring me a list of their expenses, the most common budget item left off is food. Since we would like for you to continue to eat during retirement, please don’t forget to budget for food.
Next, subtract the expenses you don’t plan to have during retirement (mortgage payment, expenses for kids at home, college expenses, etc.). Finally, add back in money for health care. If you retire before age 65, when Medicare will kick in, and your company doesn’t continue paying for health insurance, you will need to do a little research to figure out how much that will cost.
Remember that for most folks, health care costs go up as you age. We typically estimate that the average retiree spends about 75-85% of their pre-retirement income in retirement to sustain their lifestyle. However, that is just a rule of thumb. You may not be average. Do your research and then do the math to figure out how much retirement savings you will need.
Here’s how to figure it. Add up all the income you anticipate receiving from retirement sources. This should include social security, rental income, and pensions. If the amount you anticipate from these sources is equal to or more than what your expenses are then you are in good shape. If not, the remainder will come from what you save in your 401k’s, IRA’s, Roth’s, etc.. Now multiply the number of your yearly gap by 25. That should give you the amount of savings you need so that you can draw the recommended 4% annually from your investments.
For example, let’s say your expenses are $4000 per month to keep yourself fed, clothed, housed, and living the retirement lifestyle that you want. You have $1500 from Social Security and $1000 from a pension for a total of $2500 per month. That results in a shortfall of $1500 per month, or $18,000 per year. $18,000 x 25 = $450,000. That’s the amount you will need in your savings for retirement (401k, IRAs, Roth’s, etc.) to close the gap. Now, these are estimates. You’re probably not “normal” or average. Do some figuring and research.
Waterstone Private Wealth Management offers personalized money management services for investors with portfolios of $500,000 or more. To schedule a FREE personal consultation, so you may fully understand the benefits that our private clients receive, please call us at 918.272.1120 or visit our website at www.waterstonewealth.com. 9500 N. 129th East Ave, Suite 106 Owasso, OK 74055.
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