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Topic: Retirement Planning Q: How much money does someone need to retire comfortably? A: The headline on the article was typical. "Is $1 Million Enough?" It's a common number that gets tossed around when speaking about how much money people need to stash in their nest egg to pay for a comfortable retirement. Granted, $1 million isn't what it used to be, but still, that's a lot of money. Does the number overwhelm you so much that you don't even bother to save? Is retirement going to be a nightmare if you don't have a nest egg that large? How much do you really need to have saved for retirement? The answer to the last question, of course, is that it depends. There is no magical nest-egg number for retirement. One million dollars may be just right, not enough or far more than you may need. It all depends on your personal circumstances. A better question to start with is, how much will I need to live on? The rule of thumb is that retirees need roughly 80 percent of what they lived on before retirement. If you make $60,000 a year now, you'll need $48,000 a year (plus inflation costs) for retirement. That's based on the idea that certain pre-retirement expenses decline or disappear during retirement. Costs associated with working, such as transportation and clothing, are gone, as are payroll taxes (Social Security). You'll also quit setting aside part of your paycheck for retirement. Income taxes may decline and you likely won't have a mortgage to pay (though real estate taxes will continue). You may spend less on automobiles. But like any rule of thumb, that 80 percent is rough, at best. Some people may be able to maintain their standard of living on just 70 percent of pre-retirement income, while others will nudge close to 90 or even 100 percent. Much depends on what kind of retirement you envision. A quiet, stay-at-home retirement is a lot less expensive than one that takes you around the world on cruises. Will you move to a state where the cost of living is less or more? Do you want to leave part of your estate to your heirs, or do you intend to spend every last penny? Spending patterns also vary during retirement. Some retirement experts describe retirement as really three stages, not one. The first stage is active, with travel or other dollar-consuming activities most likely to occur. Life slows down a little in the passive stage, and so do costs. The last stage is far less active, though costs could rise again because of medical care due to deteriorating health. Another big factor in how much money you need to accumulate for retirement is at what age you plan to retire. Some people want to retire in their mid-fifties or early sixties. They will need to have much greater financial resources than someone who plans to work well past normal retirement age, even if only part-time. What financial resources you can bring to retirement make a major difference in how large you need to build your nest egg. Someone who works for the same employer for years and expects a good pension may not need to save as much as someone who changes employers often or who must fund their own retirement plan at work. Social Security replaces a higher portion of pre-retirement income for lower-wage workers. For higher-income individuals or for younger workers, many financial planners don't even figure in Social Security because of the uncertainties surrounding the future of the program. How well you are prepared to fend off financial emergencies also makes a difference in retirement planning. The quality of your medical plan and the availability of an adequate long-term care policy can make a big difference in demands placed on your nest egg should you encounter serious health problems. The important point is not to be bedazzled or put off by large numbers floating around. No one number fits everyone. How much is enough for retirement depends on your individual financial circumstances, how your money is invested and the returns on those investments, the type of retirement you want to have and the financial resources you can bring to retirement.
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