One of the most common retirement questions people ask is, “When will I be ready to retire?” What many people don’t realize is that there’s a better question they should be asking, and that is, “Can I support my ideal retirement lifestyle, and for how long can I support it, with what I have saved?”
There is no magic savings amount that will guarantee a worry-free retirement for everyone, but you can prepare well and create a plan that is right for your unique life. Since you need your retirement savings to last as long as you do, calculate how much money you need in order to retire by asking these four questions.
What Does My Ideal Retirement Look Like?
Before you can calculate a financial goal to aim for, you need to decide what you want your retirement to look like. Are you planning to downsize and live simply or travel around the world and invest in hobbies? Your retirement will not look like anyone else’s, so the amount you need to save won’t look like anyone else’s either.
What Is My Spending Plan?
Creating a spending plan is a good practice no matter what age you are, but it’s especially important as you draw closer to retirement. Mapping out your expenses and income will help you create a few different scenarios to determine when you can retire and what your income will look like at different points in your retirement. This doesn’t mean you have to track every single purchase for the rest of your life, but a spending plan is an excellent tool to give you an understanding of how much you are currently living on so you can develop an understanding of what you’ll need down the road. By having a spending plan, you can establish a baseline of how much your nest egg will need to be to support your desired lifestyle.
How Long Will I Live?
We don’t expect you to have an answer for this one, but the point is to understand longevity risk, or the risk of living longer than you expect, and plan to have enough money for a longer life. In a perfect world, you’d know exactly when you were going to die, and we’d build the perfect plan that ensures your money lasts just as long as you want it to. But the reality is, determining an appropriate planning horizon is a bit of an art and a science. If you die sooner than your planning horizon, you could have spent more money in retirement than you did. If you die after your planning horizon, you could run out of money altogether.
With life expectancies constantly increasing, it’s not uncommon for people to have a retirement that spans 30 years—just as long as your career. (1) That’s why it’s important to plan for longevity, so you can make sure your money lasts as long as you do.
We recommend looking at your family’s medical history as well as life expectancy tables to get an idea of how long you may live. Once you have an estimate, add on an extra 5 to 10 years to account for unexpected medical and long-term care costs.
When Can I Retire?
Once you’ve taken these three factors into account, work backward to calculate a ballpark figure of how much you still need to save to confidently retire. If you want a more detailed number, you’ll also need to consider inflation, longevity, market risk, and healthcare costs.
Moving from the accumulation phase to the distribution phase of your investments takes a specialized approach in risk management and income planning. Financial planning issues, such as when to take Social Security and planning properly for healthcare and long-term care, need to be addressed. Estate and tax considerations are unique during this phase as well. Regardless of where you are on the path to retirement, it’s critical to have a personalized plan and number to work toward.
At Calamita Wealth Management, we are here to point you in the right direction. Schedule an introductory phone call using our online calendar or reach out to us at (704) 276-7325 or todd@calamitawealth.com.
About Todd
Todd Calamita is the founder and managing principal of Calamita Wealth Management, an independent, fee-only wealth management company located in Charlotte, NC, serving people locally and across the country, that focuses on providing wealth management solutions to affluent individuals over age 50 and their families. Todd has more than 20 years of experience in the financial services industry and is passionate about helping people have a better life by designing and implementing customized financial plans that bring clarity and confidence. Todd is a CERTIFIED FINANCIAL PLANNER™(CFP®) and CERTIFIED DIVORCE FINANCIAL ANALYST® (CDFA®) and holds a Bachelor of Business Administration from Ohio University and a Master of Business Administration from the Weatherhead School of Management at Case Western Reserve University. He has authored a book, Plan Smart: Conquering 10 Common Money Traps, as well as numerous articles on wide-ranging personal finance topics, from taxes to retirement accounts. He has also been featured in a Financial Boot Camp TV series as a volunteer showing people how to make smart decisions with their money. When he’s not working, you can find Todd spending time with his wife, Teresa, and their two sons, Colin and Cameron. He enjoys rock climbing, swimming, and traveling, and he has a black belt in Tang Soo Do, a Korean martial art. To learn more about Todd, connect with him on LinkedIn.
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