How Much Money Do You Need to Retire Comfortably – The Real Question

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When talking about retirement you could talk for a long time and still only come up with hypothetical. How much money do you need to retire comfortably is the real question to be asked. Is it a Million, or 5 million or can you get away with less? From working with Financial Advisers that discuss : logical ways to invest and ways, wisely making your money last, approaching the emotional side of splurging and enjoying the last years of your life. Most retirement plans can be anyone’s guess until you are actually there.

Current vs Future Residency

When considering retirement the first question to ask is how do you view your lifestyle in retirement versus how it is currently. Another question is if you are planning on living the same way you currently do then you have a good idea of what to expect. You know what your utilities cost, your food expenses, your typical monthly expenses will not drastically change once you decide to retire or have a change in your income. You could plan on downsizing? Will you have excess money from the sale of your current home to invest (or will you plan to rent it out for additional income), or are you looking to live somewhere where housing is more expensive?

The housing payment has been one of your largest payments you’ve ever had to consistently make. Have you paid off your home? Congratulations, you’ve eliminated one of your largest expenses and now its time to decide what the best move is to make. Are you still going strong and able and capable the smart move is to stay where you are and keep in your current situation.

Are you motivated to move to either be closer to family or to downsize you need to review what you want in your next phase of life. Do you want a small condo or a large house with a yard to tend do during the day? Just because you may be moving to a location where housing is cheaper doesn’t mean its time to go move into the largest house. Big houses tend to have more upkeep, utilities and tax payments.

If something were to happen where you needed more immediate care would you have family nearby or would you need to look at an assisted living center. With most assisted living centers costing more than the typical mortgage-at times several times the typical mortgage-that added expense is not expected especially when it comes earlier than planned.

Additional Income

Once you have your expenses lined up the next question comes to income. It’s strange how a lot of times you hear people say you need $5 million to be able to retire, or you need to have 25 times your income. Those are great guidelines but you’ve never had to deal with your everyday life that way, and it becomes difficult for that transition to take place. The real question here is how much income do you need and where is it coming from?

Have you picked up a side job that you can continue to work out? Do you own any income producing assets such as rental properties? Do you have a large nest egg that you much take distributions from?

Additional income is one of the primary factors to having a good idea how well you can retire and if you’re ready to retire. Do you have already been receiving this monthly income you can continue to project that income after retirement with no change whatsoever.

Healthcare

Healthcare expenses is becoming the largest unknown factor. For those who can contribute to a Health Savings Account (HSA) this can help build funds to pay for future health expenses tax-free. But if you are closer to retirement age you may not have been able to start an HSA and you are relying on Medicare and other supplemental insurance programs.

However, if you’re retiring under the age of 65 you most likely will not be eligible for Medicare and will need to find a self-insurance or health share to help cover the benefits that were previously sponsored by your employer.

Similar to the residency you will need to build a buffer account to prepare for any unexpected large medical bills which could include anything from prescriptions to the cost of long-term care or assisted living center.

Residual Cashflow Income

Similar to how Additional income from side-jobs can help support you in the long-run how effective your nest-egg is can make a dramatic impact on planning your cash flow in the long run. This typically is the biggest hangup on if people can retire early. Do you have additional income coming from a side gig, if so, you won’t need to bank on this as much, but if you’re playing the accumulation and build a nest egg to withdraw from this is what can fluctuate the most.

Let’s look at an example:. You have a million dollars in cash.

Do you put it in a high yield Savings account you’ll be earning about 2.5% which would produce $25000, typically not much but it will be guaranteed from any market volatility.

Do you focus more on income producing stocks you will be getting higher dividends $50,000- $100,000 5-10% returns but there could ultimately be some loss in equity if the stock price falls.

Do you purchase four rental property homes at $250,000 each renting them out for $2000/m each and you would be earning $70,000+ after considering taxes and insurance payments.

Do you invest in some higher minimum passive income options, we have seen dividend returns between 8-18% not including appreciation.

We’ve come up with income from $2000/m to over $10,000/m depending on how much you can get with a million dollars. Everyone is different in how risk averse they are and the older you get the less time you feel you have to wait for downturns to recover. But there are still stable investments that can provide better than the average savings account, and even if you split you money and started shifting it from high returns to lower returns you will be able to benefit from the nest egg growing.

 

In Summary

The biggest question with retirement is how involved are you currently in managing your money, are you preparing now for the future and what additional income and investments are you focusing on to provide you the best scenario for retirement. Identify what your current trajectory is and make adjustments if needed for a smooth transition.

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6 Comments

  1. Gosh, I haven’t put much thought to my retirement but I guess it’s better to do so earlier than later. I am saving up to invest in a property and that will definitely always be able to help me in the future. That is really the long term goal.

    Thanks for your article, its given me a lot of food for thought.

    • Excellent choice.  I have invested in real estate and with my more recent plans have made much more than I have invested in my individual 401k plans because of the limits.  

  2. Hey,

    your post covered the most important aspects of the topic in a concise manner. The different factors that come into play and their importance in our future are well-explained. Retirement is indeed a thing that, being rather young, is difficult for me to conceive, and yet I feel like it is important to take it on early on.

    At what age would you recommend planning for retirement?

    • Ha, in an ideal world your parents would have started planning for your retirement.  After that, whenever you can start saving beyond your typical expenses is when you can save.  Too many people think they’ve heard of the times that if they would have started when they were 20 they’d have so much more than if they started today.  Though that’s true, that’s mostly if you invest through an IRA, and that’s great way to save for retirement but not the only way.  I’ve made many more times what my 401k balance is currently, in a matter of a few years through business ventures.  So once you can see there is a bigger picture than the long invest and hold and wait game you will be able to see retirement ‘planning’ is less about slowly saving up and more about money management before retirement. 

  3. Oh goodness! You are tackling one of my least favorite topics in retirement, mostly because I was seriously dumb when I was younger and it’s difficult to play catch up now. You have brought up some excellent points in projected expenses you might need to cover, and how they could be different if you downsize. Though rental properties are an excellent investment if you can swing it and play it smart! Thanks for the article. I’ve been trying to get more financially savvy, and that includes the dreaded budgeting and retirement stuff that normally makes my eyes glaze over. But it is really something everyone needs to think about, especially the young! 

    • Everyone will face retirement it all depends on how we prepare for it.  Hopefully, this can help you feel more prepared.  I know of people who go slow and steady through retirement plans and others who get large chunks at a time through Real Estate and other alternatives.  Best of luck to budgeting and planning for the future.  

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