Have you ever noticed how many sites and magazines talk about how you’re going to need outrageous amounts of money to retire in the lifestyle you want?
I mean, they make retirement savings such a lofty ideal that it’s often less than motivating!
Wouldn’t you agree? Saving millions of dollars when some of us are barely getting by seems like a goal that will never be reached.
So what do we make of all this talk that you need at least $3,000,000 to retire? Can you really afford retirement if that’s the case?
Let’s take a look:
Why Do Some Suggest You Need Millions to Retire?
Understanding where some of these large numbers come from will help put this in perspective for us. Have you heard of something called Withdrawal Rates?
Basically, a withdrawal rate simply identifies the percentage at which you draw from your retirement assets. For example, if you have $300,000 in an IRA and you are pulling out $30,000 for income each year – what withdrawal rate would that be? Yes! 10%.
Now, here’s the deal – consensus says that a “safe” withdrawal rate, which means how much you can reasonably withdraw without running out of money, is 4%!
So if you have a $300,000 portfolio and you go with a “safe” withdrawal rate, then you could only pull out $12,000 per year or $1,000 per month for retirement.
Let’s say you’re making $80,000 per year pre-tax and you want to maintain that income in retirement as well as keep within your “safe” withdrawal rate you would need to have $2,000,000 saved in order to do that!
How Much Do You Really Need to Retire?
The magical question right!? How much money do you need to retire? Unfortunately, there isn’t just one answer that satisfies every single situation.
Your situation is probably different than your neighbors or your co-workers, and the variables are so great that it’s tough to just come out and say, “You need $3,000,000 to retire!”. But, that’s what sells magazines and gets people reading blog posts.
So, what is the right answer then? Well, the “right” answer is “it depends”, but let’s delve into that a little further.
Here are some good questions to ask to help get us closer to the answer:
- Will you have any liabilities in retirement?
- How far away is your goal?
- Will you have a pension or other sources of income in retirement?
- Do you plan to downsize or upsize your home?
- Do you plan to travel extensively?
- What sort of things do you want to do in retirement?
Maybe you’ll have paid off your mortgage and all other debts and really just need enough to pay your real estate taxes, utilities and normal monthly expenditures like food and clothing.
Perhaps you want to travel the world and maintain winter and summer homes. The point I’m trying to make is that the amount of income you need in retirement depends on what you want to do.
Figure out how much it’s going to cost you to live and work your way backwards. Sure it’d be nice to live off your pre-retirement income, but you may not need to! And that is perfectly OK.
In fact, it’s good to simplify your lifestyles and look for opportunities to give to others instead of spending lavishly on yourself!
Retirement Success?
Understanding what your goals are, how much those goals will cost, how to create additional revenue streams in retirement and living simply will help push you to retirement success.
But to me, in its simplest terms – retirement success is about people, passion and purpose!
Don’t forget that retirement is a great time to build relationships with family, friends and neighbors. It’s also a great time to pursue your passions, your hobbies and your joys! And most importantly, it’s a great time to live life on purpose! God has put you here for a reason, so figure out what God has in store for you and live for Him.
Also remember that right now is a great time to pursue those things as well!
You may not save $3,000,000, but do the things you need to do to get on track financially anyway – like working hard at becoming debt free, socking money away, and giving generously, and you’ll be surprised – you might just be able to afford retirement after all.
What Are Your Thoughts?
Do you think you’ll be able to afford retirement?
{ 10 comments… read them below or add one }
There are so many unknowns regarding retirement. A major factor of figuring out what you may need depends largely of the rate of inflation and the value of money in the future, which no one can accurately estimate.
I’ve got 28 years till age 55. In the last 28 years, inflation rates have been 2.84%. If that rate stays the same for the next 28 years, then even $2 million in 2038 will have the spending power that $892,000 has today. This doesn’t even figure taxes.
I think it’s helpful to be mindful of such factors and to live your life for Christ, He’s all you’ll ever need.
Yes, we’ll be able to afford retirement. I just turned 25 and we’ve been saying for retirement for a while now, including God in all of our plans. And knowing that only He knows what the next day is going to bring. I want to travel when I’m retired and plan on not having any major bills: mortgage, car notes, debt. Just groceries and gas
I’ve been pretty good about staying out of debt and putting away money in my 401k and IRA’s, so I do think I’ll be fortunate to able to afford some type of retirement.
This is a great post. Not everyone needs $3,000,000 to retire well. Think about what you actually want to do in your retirement years, calculate how much those activities will cost, and you’ll have a rough idea of how much you’ll need to retire well.
My challenge is that I’m not exactly sure what I actually want to do in my retirement years. But since I’m saving pretty diligently, I think I’ll have options.
Many people find that it’s a great time to pursue your passions. But as you mentioned, now is a great time to pursue your passions as well. Why make yourself wait a few decades?
According to one of my Dave Ramsey FPU forms, to retire in 20 years on $25-30K/year, I need to save up over $225,000….
I have a LONG way to go. :/
I worry about being able to retire with some dignity.
Here’s my take. When you retire, you have no payroll tax (7.65%?) and you’re not saving for retirement (duh). This is about 20% right off the top. Right now, my mortgage is still about 15% of our gross income, and it will paid before we retire. I think that 70% replacement ratio is right for most people. But – an $80K earner will find a social security benefit of over $25K or 32%.
This leaves 38% (call it 40) to replace. That $80K earner needs $800K in the bank to withdraw the $32K/yr shortfall. I’d not want to build it into my own plans, but for some, a downsized home can boost that retirement savings. Move from a $300K house to a $150K one and your expenses go down while you pocket the $150K. This all makes it feel a bit more managable.
No, I won’t be able to retire. When my husband died, I was just short of forty, with two teenage daughters in high school, and I had been a homemaker for most of their lives. The insurance wasn’t enough (don’t get me started on whole life, the biggest mistake we made) to help much, but at least it covered some things while I had to find a job. The girls got good financial aid packages at Duke and Stanford, and I eventually went back to school myself since cleaning houses isn’t a good job long-term. Now, I’m within weeks of my BA, and will be in grad school in the fall. The debt isn’t as bad as it could be, since I got my AA working full-time and attending class part-time.
But, there’s been no real chance to do more than make a living on the little I was making. I’m hoping that, since I’m used to living on little, that once I’m working full-time again I can put more in the bank. No credit cards, no mortgage, vehicle paid off. Things could be so much worse.
It really depends on a lot of factors, as you mentioned above. We live a relatively frugal lifestyle, so we likely won’t need a lot of money to retire on (assuming our debts/mortgage are paid off by then, which is the plan). Also, we need to be prepared should there be no Social Security in another 30-35 years.
This site is awesome. Love the education. I do have question or two – hope you are able to help clarify:
1. Between me and my wife, can we put 10,000 (for 2009 yr – I know the deadline was today but I am just asking) in ROTH IRA? Could we open a joint IRA account at lets say Fidelity and have 10,000 deposited or do we have to have separate accounts since one person limit is only 5,000?
2. I have 401K at work and wife does not (she has pension but she won’t qualify for another yr). I know I can put 16500 max (again assuming 2009 limits) in my 401K but I am confused between 401K, traditional and Roth. If I did put 16500 in my employer 401K, can I also put 5000 in traditional IRA and 5000 in Roth IRA? That is total 26500 per person allowed to be deposited in retirement account, correct? I do know that only 21500 is pre tax and 5000 in Roth is after tax.
3. Since my wife doesn’t have 401K at work, can she only do traditoinal and Roth totaling 10000? Is there any other way to save more? (I know she has option to get paid on 1099 basis vs W2 fm work – would that be beneficial over getting paid in W2?
Thanks a bunch guys.
If you live frugally, a $3,000,000 would be fine as long as you give 75% of it away to charity! I’m with Joe Taxpayer on this one. A frugal lifestyle has no mortgage payment, spends about half the living expenses of most people and has no consumer debt. If you are like our friend Darcyjo, you could get by on around $15,000 a year. My mother in law did.
Darcyjo: Even if you need $20,000 (inflation?) Social Security (assuming its still around) will pay your retirement based on your husband’s earnings unless you marry again before you’re 60.
Let’s estimate you get $12,000 from Social Security, now you need to save just enough to get $8,000 a year. Saving $200,000 should be enough for a frugal individual. I don’t know how old you are, but if you started at age 40, you could retire at age 70 if you put away just a few hundred a month and invested the money wisely. Just shutting off your cable and cutting a few bills should get you there. It will be hard but not impossible. It’s a matter of deciding what you really want in life and making it happen.
If you want to retire, STOP wasting money…
I for instance am 37 years old. I have NEVER in my life owned a new car. I have NEVER in my life paid more than $5300 for a car. Yes I’m serious. I drove my last car to 360,000 miles before selling it on eBay for $800 and it STILL RAN and looked very shiny and new when I sold it. (I wax my car all the time and take very good care of it) I currently drive a Subaru that looks brand new with 188,550 miles and I plan to drive it till it’s well over 300,000 miles hopefully more.