By Dave Coen
There was a time when a $1 million nest egg was the golden standard, the measure of success. Having a million saved away essentially guaranteed the retirement of your dreams. Unfortunately, those times are over.
Instead of $1 million being the ultimate retirement goal, nowadays it’s not uncommon to read articles teaching how to survive with a meager million-dollar retirement fund. Sad, right?
You can thank inflation for that.
So, that leads us to the question: How much do you actually need in retirement?
Well, as you’re about to see, the answer is not so simple. There are many variables involved. Let’s take a look at a few of the biggest ones.
What is My Financial Exit Plan Strategy?
One of the most important things we will have to determine is the strategy you would use to combat the various retirement risks. We have a list of 23 Retirement Risks that we walk our clients through in order to make sure that we have considered how each one might affect their planning. I would strongly suggest that you discuss these with your advisor as each family is unique.
Where Do You Plan To Live?
It’s no surprise that your ideal nest egg largely depends on where you live. After all, the cost of living varies dramatically from state to state (and even more from country to country).
But what’s surprising is how much a difference this can make. Let’s stick with the million-dollar retirement savings example. According to a study by GoBankingRates, $1 million in Mississippi will last you almost 26 years. Not bad. But in Hawaii? You’ll be lucky to last a dozen years before that savings runs out. (1)
That brings us to another question: Do you own your house? Have you paid off your mortgage before retiring? Sometimes that could be a good thing, but other times it might not be. We have seen too many people run out of cash in retirement and have their homes paid off. This is one of the 23 retirement risks.
What Are Your Goals?
Another factor to consider is the lifestyle you want in retirement. Do you want to travel for several months each year? Donate to charity? Leave a legacy for your family? If your dream retirement lifestyle is considerably different from your pre-retirement lifestyle, you need to take that into consideration.
What Accounts Will You Draw From?
This one is often overlooked. Take a look at your retirement accounts for a second. What does the balance look like between tax-deferred accounts (e.g., 401(k) and traditional IRA) and tax-advantaged accounts (e.g., Roth 401(k) and Roth IRA and a Private Reserve account)? Do you have a safe tank that could be used to combat Sequence of Returns risk? It should be designed to give you an extra 5-10 years of retirement money.
When determining how large your nest egg needs to be, you can’t forget about taxes. Remember, you need to pay taxes when drawing from tax-deferred retirement accounts. That means if you need $61,000/year for living expenses, you’ll actually need to withdraw a bit more than $78,000. (2)
On the other hand, if you’re invested in tax-advantaged accounts, you don’t need to worry about taxes when withdrawing (as long as withdrawals meet certain qualifying criteria).
How Long Until You Retire?
We’re seeing that a $1 million nest egg isn’t what it used to be, and as time passes, it’ll be worth even less. The long-term average annual inflation rate is 3.22%. That means prices are expected to double every 20 years. (2) With that in mind, it’s easy to see that you’ll need much more (per year) to retire in 20 years than if you’re retiring next year.
A Few Other Considerations
Some other questions to ask yourself are do I have a pension? When should I take social security? What is my floor? Do I have long-term care insurance? Have I implemented the “En Passant” financial rule?
The Bottom Line
So, how do your retirement savings stack up? Are you on track or falling behind? If it feels like you’re not where you should be, don’t panic. There are many ways to get back on the right path, and they all start with one thing—a solid financial plan.
At SageView Advisory / College Planning America, we can help you put together your own financial road map—a step-by-step plan for reaching your financial goals. If you’d like to get started, email me at dcoen@sageviewadvisory.com or call 800-814-8742 today.
About Dave
Dave Coen is a Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his retirement financial industry experience, he is a College Planning Specialist. He works closely with individuals and families to provide them comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
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Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least 5 tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
This material is designed to provide accurate and authoritative information on the subjects covered. It is not however intended to provide specific legal, tax, or other professional advice. For specific personal assistance, the services of an appropriate professional should be sought.
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(1) https://www.gobankingrates.com/retirement/planning/how-long-million-last-retirement-state/
(2) https://inflationdata.com/Inflation/Inflation_Rate/Long_Term_Inflation.asp
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