Is There A Magic Numer for Retirement?
Everyone wants to know the magic number needed in savings for a great retirement. As a result, there is no shortage of articles on the topic.
Here Are Three Different Thoughts
An April 18, 2024, article on cbsnews.com stated that most Americans think they need at least $1.46 million to retire comfortably. If that were accurate, I would be in BIG trouble!!
Another article from Fidelity, dated February 15, 2024, stated that you should have ten times your last annual income by age 67. So, if your income was $40,000, you should have at least $400,000 in savings. That was another retirement threshold I failed to reach. If I had waited for ten times my income, I would still have been working full-time.
Then, there is the theory that you need 80% of your pre-retirement income. That would mean you should have enough savings to supplement Social Security to achieve that goal. So, if your income pre-retirement was $100,000, you would need $80,000 ($6,666 monthly). If Social Security provided $3000, you would have to generate an additional $3,666 monthly. Using the 4% rule would mean you should have $1,100,000 in savings. All I can say to that is, “Phew!” I'm glad that doesn’t apply to me either.
What About $100,000?
In July 2024, I read two articles about whether $100,000 was enough to retire. As you might expect, one was written from the perspective that you can have a great retirement on $100,000. The other stated unequivocally that a great retirement on $100,000 was impossible.
I loved the one in Moneywise with the headline: “8 In 10 Retirees 65 Plus With $50K to 100K in Savings Living Decently In Their Golden Years.” That article quoted statistics from the Fed that found that 81% of those having between $50,000 and $100,000 reported living comfortably or doing OK.
Not unexpectedly, I soon read another article with the headline: “Sorry, But Retiring Comfortably with $100,000 in Savings Is a Myth for Most People. Here’s Why.”
This article mentions that the previous article relies on data from the Fed. And somehow, that is inaccurate.
Still, no one has yet to provide an answer for how much you really need if you want to have a great retirement.
However, all these articles have one thing in common: they refer to “dedicated” retirement savings.
My Experience — A Contrarian Take
Three years ago, at age 68, I decided to retire. My biggest fear was that we would not have enough income for an optimum retirement without my insurance business. Moving away from North Carolina would likely mean my business income would drop over time.
Sadly, we had very little dedicated retirement savings and not much in any savings at the time. To say that I was nervous would be a colossal understatement. My goal was to reach 70 before drawing my Social Security retirement. I knew that would be our best hope of having a great retirement.
My wife and I each had a small retirement account that we converted into life income with 100% survivorship. But that created just under $500 monthly. That, plus my wife’s Social Security and my insurance income, would have been enough to get us to my age of 70. But without my insurance income, we would be screwed.
If you have read my past articles, you know we took advantage of the crazy real estate market in 2021 and sold our North Carolina home. We then purchased a small, one-bedroom home in Green Valley, Arizona, for far less than we received from selling our North Carolina home. Overnight, we finally had some retirement savings.
More importantly, our monthly fixed cost for the new house, including utilities, was so low that we could enjoy life and start building our savings.
And that brings me to the question: how much do you need in savings to have a great retirement?
How Much Do You Need in Savings?
First, it is essential to understand that there is no universal number or formula. It is possible to enjoy a fantastic retirement with little or no savings. That doesn’t mean that you should not strive to create savings. But your savings may have more to do with peace of mind than a need for income. To understand this, let me share my experience.
When we owned the one-bedroom, our monthly fixed expenses were $595. That included our HOA dues, electricity, telephones, internet, and gas. Our groceries averaged $700, bringing our total to $1295 monthly. For October 2023, we spent $248 on eating out, including take-out. That brings our total to $1443. Taxes were $600, and I paid that annually.
So, here is the point. According to the Center on Budget and Policy Priorities, the average monthly Social Security retirement check in February 2024 was $1862. After paying the Part B premium of $174.70, the average recipient would have $1687 left, enough to cover our expenses. Of course, as a couple, we might have twice that or $3374.60 monthly.
If we had $3374, there would be $1931 remaining after core expenses. If we allowed for an additional $500 monthly for miscellaneous expenses, this hypothetical couple could save $1500 monthly or $18,000 annually. Essentially, that is what my wife and I did. As a result, we enjoyed a fantastic retirement since May 2021.
Basically, we looked at our combined Social Security checks plus our combined annuity checks of just under $500 and created a lifestyle that did not include her Social Security at all. And while I continue to earn insurance commissions and some income from writing on Medium, most of that also goes directly to savings. It is important to note that I did not want a lifestyle that required any extra income. I wanted a lifestyle that would allow me to quit earning extra income if I desired. That was the most important criterion when making our choices.
Your situation may be different. You may not want to move across the country for a lower cost of living. It may be important to you to have a larger home where your children and grandchildren can come and stay comfortably. Instead of a lifestyle with costs below your fixed income, you may need an additional $500 monthly. To discover how much I would need today to create that additional $500, I used a great present value annuity calculator. The calculator told me that, assuming 3% interest, I would need $139,671. At the end of those forty years, I would have zero remaining.
Potential Long-Term Expenses
Even if, like me, you do not need savings for income needs, there are still reasons to have savings. That leads to the second step: identify how much money you need in savings for expected long-term needs. This is where you need to be brutally honest with yourself.
If you own a home, is it likely that you will need to replace the roof, the HVAC, or other big-ticket items?
In Green Valley, I can expect to pay between $6000 and $8000 for a new, installed HVAC system. Since my current system is ten years old, I expect to replace it within the next seven years. Using a forward flat rate inflation calculator and assuming a 3% inflation rate, I will need $9838 in seven years.
NOTE: I assumed $8000 in today’s cost. I strongly suggest that you always use the high end of a price range for planning purposes.
How old is your car? What is the probability of needing to replace it?
I currently own a 2016 Prius with 85,000 miles. It is highly likely that I will need to replace my car sometime within the next ten years. After some research, I know that I can purchase a new Prius for approximately $27,000 today. Using the same inflation calculator, the cost in seven years will be $33,206.
Identifying medical expenses is a more difficult task but one worth exploring. If you or your spouse developed a serious medical condition, can bills be paid out of your current income, or would you need to withdraw from savings?
To answer the medical cost question, analyze potential costs. To help you understand this, let me share my situation. My wife was recently diagnosed with a serious medical condition. We are both covered by a Medicare Advantage Plan. Our maximum out-of-pocket in-network is $3800, and out-of-network is $5200. Knowing that there is always the possibility of incurring this maximum in multiple years, I need to see whether I could absorb that out of my current income or whether I would need money in savings to deal with it.
Even though I could pay these costs out of my current income, I would plan for at least three years of annual maximum out-of-pocket costs. In addition, I would base these costs on the out-of-network maximum of $5200. In today’s dollars, I would need an additional $15,600.
I also know that in our crazy healthcare system, my maximum out-of-pocket expense will likely increase. As a result, I plan to have $25,000 in savings.
So far, I need at least $68,044 in savings to cover these estimated and likely expenses.
The Total Needed in Savings
Since my wife and I have created a lifestyle that can be paid out of my current income with money left over for savings, I only need to focus on my potential long-term expenses.
If I were nearing retirement today, I would focus on retiring with a minimum of $60,000. At 3% interest, the savings would grow by $1800 per year.
If I needed an additional $500 monthly for my preferred lifestyle, I would also want to have $139,671 in savings before retiring, for a total savings need of $199,671.
The formula for finding how much you need in savings is simple. It is:
Total expected long-term expense + amount required to generate income above Social Security = total savings needed.
Two Additional Considerations
Consider two other things. The first is calculating inflation to determine the additional income you need.
I ignored inflation in my case. It was more important to me to design our lifestyle so that my Social Security income and the two small annuities significantly exceeded our costs. This has resulted in us saving 100% of my wife’s Social Security check. Indirectly, I have planned for inflation by having substantially more income than is needed for our lifestyle.
In my opinion, our approach is better than factoring in inflation for income needs. If the last three years have taught us anything, there is no way to know the future inflation rate. However, inflation becomes a non-issue because of lifestyle costs that are significantly lower than our total income and growing savings accounts.
The second consideration is long-term care costs. Under the banner of long-term care, you have nursing home / assisted living costs and care at home.
The truth is that in the absence of significant financial assets, it is impossible for most Americans to save enough money to cover nursing home costs. People retiring on a shoestring cannot afford it, nor should they buy long-term insurance.
It is essential to recognize that 89% of people want to remain at home if they need care.
In my article Do You Want to Grow Old at Home, I address several ways to help pay for some care at home.
Conclusion
Contrary to everything that is written about the magic retirement number, the truth is that your number will be different from my number. More importantly, we may discover that the magic number is low.
If you enter retirement with more guaranteed income than you need for your lifestyle, you will likely grow your savings. And once you have enough to cover most potential replacement costs, you will find peace of mind.
As I have stated in past articles, in 2021, when my wife suggested that we retire, I was panic-struck. We had significantly less than the median retirement savings for people our age. By being creative, we have had an incredible past three years and have almost five times more savings today than in 2021. Today, I do not worry about our financial future.
If you are single, dismissing the ideas I have shared may be tempting. However, as already pointed out, I was hyper-focused on creating a lifestyle that could be maintained on less than my Social Security alone. Of course, the lower your Social Security, the more challenging it will be. But it is not impossible and does not require massive savings.
I would be remiss if I did not point out that building savings is easier for a couple than for individuals since there are two Social Security checks. But it is not impossible either.
My point is simple: you only need a little in savings to have a great retirement. Life can be awesome if you have enough savings to provide peace of mind and lifestyle costs that are less than your income.
