According to a survey conducted by Northwestern Mutual, many pre-retirees have saved much less than the suggested $1.46 million needed for a comfortable retirement. However, focusing on a “magic” savings number is not the right approach to determine if you can afford to retire. Instead, the common-sense formula for retirement security should be followed: Income should be greater than living expenses. By balancing living expenses with income sources and building in a margin for surprises, it is possible to retire with less than $1.46 million in savings.
To estimate how much you will spend in retirement, list your regular living expenses and consider potential changes such as increased medical expenses and decreased working expenses. Identify must-have living expenses like mortgage or rent, utilities, and food, and nice-to-have expenses like travel and hobbies. Totaling these expenses will give you a target for the total annual amount of lifetime retirement income needed. The next step is to calculate all your retirement income sources, including Social Security, pensions, annuities, and systematic withdrawals from retirement savings.
Estimating retirement income should also consider working income during retirement years, but this source should be used to delay starting other income sources to let them grow. Additionally, consider the impact of inflation on living expenses and retirement income. The Social Security Administration increases benefits for the cost of living, but pensions and other fixed income sources may lose buying power over time. To counter inflation, some products offer fixed percent increases or future increases can be built into systematic withdrawal methods.
If it is determined that there is not enough retirement income to cover living expenses, adjustments may need to be made. This could involve postponing retirement, reducing expenses, or a combination of both. It may be helpful to seek the advice of a professional advisor if the math is difficult to navigate. While the process of determining retirement readiness may require more effort than relying on a single savings number, it is a more effective way to ensure a financially sustainable retirement. By following these steps, individuals can have a clearer understanding of what is needed to retire comfortably and confidently.
