Ask the CFP: How much money do I need to retire?

How Much Money Do I Need to Retire?

Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “How much money do I need to retire?” This brief question could easily turn into a long answer, but let’s first discuss how we view retirement goals. People generally have three types of goals in retirement – they have needs, such as healthcare, food and housing; they have wants such as new cars and annual travel, and they have wishes, such as gifts to charity, second homes or inheritance for family members.

When determining how much one “needs” for retirement, consider the total of expenses in the needs category. Let’s say this amounts to 100,000 dollars per year for easy math. If you need 100,000 per year to meet your basic needs, assuming you spend about 3.5% of your investments each year, a portfolio worth around 2.8 million dollars may provide enough income for a typical retirement of 25 years. If you add the retirement “wants” to the needs, this may bring annual spending from 100,000 dollars to 130,000 dollars per year. Using the same assumption of a 3.5% withdrawal rate, the portfolio may need to be around 3.7 million dollars. As you can probably guess, when you add in retirement “wishes” to the equation, the amount climbs even higher.

Retirement success greatly depends on having enough income on a monthly basis. If someone has enough income from Social Security, a pension and maybe a rental property or two, assuming these income sources keep up with inflation, they may not technically need much of a portfolio to meet their needs in retirement. However, since pensions are becoming a tool of the past and Social Security doesn’t provide enough income, having a portfolio to provide liquidity, income and possibly growth is key for most retirees.

Please keep in mind that I’m also simplifying what’s typically a very complex calculation. In reality, my earlier calculation excludes Social Security income, pension income, part-time income, inflation changes, longevity differences, risk and return differences, home upsizing or downsizing, income taxes and much more. This also assumes someone only spends 3.5% of their portfolio each year to protect principal, but in reality, that may not be someone’s goal to protect principal for 25 years. If you would like a very rough estimate of how much you’ll need to retire, you can divide your annual income need, less Social Security or other income, by your assumed withdrawal rate, such as 3.5%. However, determining how much money you’ll need to have a strong probability of success in retirement requires a much deeper and more meaningful calculation, not to mention the tax planning, gifting, long term care and estate matters that come into the equation.

Overall, when calculating your retirement needs, include as much detail as possible and categorize your goals into needs, wants and wishes. This may help you determine what’s reasonable based on your situation and what your options are as this next chapter in life approaches. If you have a question about this topic or have a question for next month’s video, please send it to Thanks for watching and we’ll see you next month.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.

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