How Much Money Do I Need to Retire? Retiring on Your Own Terms (You Don’t Need a Financial Advisor)

Real quick, before you review this post for your financial planning…


If you haven’t read my full post Road to Retirement In Seven Steps, I highly recommend reading it before reading this post. It was created to explain how to understand your personal finances and get you on the road to financial freedom. I recommend completing the entire post before reading this one as it has key information for getting started with your finances.


Another guide to read before this one is How to Invest in the Stock Market, which goes over the basics of investing, the stock market and how we make money from investments.


Finally, you may want to consider reading my recommendation of Personal Capital, a free financial tool to monitor and take action on your finances. This is the app that I use to monitor my own finances.


Okay – thanks for reading. Now, on to the blog post, How Much Money Do I Need to Retire?


Table of Contents


1. What does retirement mean for you?

2. Retirement Can Last Decades

3. Living Longer Doesn’t Mean You Need More Money

4. Building Your Retirement Based on Expenses

5. How Much Money Do I Need to Retire?

6. You Know the Amount of Money You Need – Now What?

7. Action Steps

 

Introduction


“How much money do I need to retire?” is a question that needs to be asked more often – at least every year seems right to me, regardless of your age. Along the same lines are questions like “How much will I receive from Social Security, my pension, or my 401k? Will this money be enough to retire?” Equally important is what you do with the answers.


Some statistics reported in 2022 seem like we aren’t asking the questions AND we aren’t doing enough. For example, Americans aged 65 and over only have an average annual income of $24,224. Even more discouraging is the median annual pension payment, which ranges from $9,000 to $22,000. What about your 401k? Unfortunately, it doesn’t look good, with only 32% investing in this financial vehicle.


And what about debt? You can live off less money if you don’t have debt – but 46% of homeowners aged 65 to 79 have mortgage debt. Finally, based on a study that asked how much Americans had in retirement accounts, the results showed that 64% of Americans will retire broke.


These statistics don’t look good for many Americans. Would the numbers be better if there was a straightforward way to monitor and plan for it?


This post will show you how to calculate how much money you need and includes a financial planning template to download. With this information, you will be able to ask and answer the question of “How much money do I need to retire?” as many times as you want and monitor your progress using your own financial data. This will help you retire on your terms.


Retiring On Your Own Terms


What does retirement mean for you?


Retiring on your own terms means spending your priceless time in any way that lines up with your values. One exercise to complete is to sit down with a pencil in hand to figure out what life would be like in retirement. What are some of your goals? Is there something that you want to do, pursue, or learn? What will be your standard of living?


When I think about how my life will be in my later years, I like to look at it across a spectrum. On one side of the spectrum are my stretch goals – it's fun to think big. On the opposite side, I like to think of less desirable but realistic scenarios and build ways to avoid them when retirement planning. It is a balance between practical expectations and the standard of living I’m striving to achieve. Everything is on the table for me when I think about retirement. Don’t forget to build in the fun, too!


Remember, retirement can be whatever you want it to be, but you need to do proper planning. One question to consider is how long you will be in retirement.


Retirement Can Last Decades


How long will retirement last? Part of this answer depends on the age at which you retire and how long you will live. If you want to take a simple test on life expectancy, try this life expectancy calculator, but don’t sign up for anything.


From a financial perspective, here are a couple of scenarios on what retirement could be to ensure that you don’t run out of money:

  • Live on your investments and Social Security.

  • Work part-time. Retirement doesn’t have to be binary: working or not working.

  • Retire later – delay to get more time in the market and higher Social Security payments.

  • Retire early – this is possible. I did it and I’m not special. I don’t have a fancy finance degree. I just used these methods.

Remember, retiring on your own terms is completely within reach if you plan for it.


Living Longer Doesn’t Mean You Need More Money


A good example is geo arbitrage. Geo arbitrage is having or earning a higher cost of living but living in a lower cost of living place. This could be living in a different state. For example, I lived in NYC for more than 30 years and I loved it! But my plan is not to retire there. I made NYC money and will retire in a less expensive state with a lower cost of living. Here are a couple of states to consider according to the Missouri Economic Research and Information Center:


  • Mississippi

  • Kansas

  • Oklahoma

  • Arkansas

  • Missouri


What about another country? There are countries all over the world where you will have a cheaper cost of living compared to the United States. Here is the 2022 Global Retirement Index of the top 10 countries to live in:


  • Uruguay

  • Spain

  • Malta

  • France

  • Ecuador

  • Colombia

  • Portugal

  • Mexico

  • Costa Rica

  • Panama

The beautiful thing is that it is much more acceptable to work from anywhere in these modern times. This means you don’t even have to wait to retire to take advantage of the geo arbitrage life hack. You can do it right now! You can even go one step further and get dual citizenship. I’m working on my second one right now!


Another way to take advantage of the geo arbitrage life hack is to get medical or dental care in a different country, which is called medical tourism. For example, Mexico is known for its good dental work at a fraction of the cost.


Building Your Retirement Based on Expenses


While many financial advisors calculate how much money you need to retire based on income, a more accurate way, I think, is based on expenses. Income is important because having more money helps you to invest more, but expenses calculate what you are already spending. In my blog post, Road to Retirement in Seven Steps, we cover how to work on your personal finances and understand how much money you are spending today.


Knowing your expenses today will give insight into the future; however, you need to think about what your expenses will be down the road. What expenses will be the same or different?


I built a financial portfolio that is flexible and gives me the ability to adjust based on life changes. Part of my considerations were:


  • Debt, including mortgage – can I have this paid off before I retire?

  • Healthcare insurance and costs – will I be eligible for Medicare?

  • Travel – how much do I plan to travel? What type of travel?

  • Cost of living increases, including inflation.

  • Day-to-day activities – what will you do when you retire? Build in fun!

  • Extras that I want to do in my retirement.


All of these are key factors when you plan for retirement. This is the reason I advocate looking at your retirement planning frequently. It’s important to see the progress that you are making as well as see if your thinking has changed. You need to be actively engaged.


How Much Money Do I Need to Retire?


As stated before, the best way to figure out how much money you need is to use your own data. Again, no need to engage a financial advisor when you have access to this information right in your bank account or even better from a financial app, like Personal Capital (Here is my write up on Personal Capital). The best place to start is by calculating your monthly expenses. If you don’t have this calculated yet, look at this post on the Road to Retirement in Seven Steps to get you started.


We need to know your monthly expense number.


Don’t worry - If the following seem like tough calculations, I have added the variables to a financial planning template for you to download. I have also included a picture for you to see how it will work too.


Once you know your monthly expense figure, input it into the spreadsheet. The spreadsheet will automatically create your annual expense. This will give you the amount of money you need on an annual basis. For example, if you have monthly expenses of $3,333, multiplying that by 12 months in the year is $39,996. This is your annual expense.


This annual number is what you are currently spending on your expenses, what you currently need to live per year. We will also use this as the basis for trying to figure out how much you need to retire.


When calculating your initial number, we want to figure out an estimate for now. We are just trying to get started. Remember to be patient with yourself as you go through these exercises.


Now that you have the annual expense figure, the next calculation is to take that annual number and multiply it by 25. For example, multiply $39,996 x 25. This number is close to $1 million. In theory, this is the amount of money that you will need for retirement.


Don’t be scared by this number – we aren’t finished!


We need to know this number so that we can set a goal for what we are trying to accomplish. With these two numbers – annual expenses and projected retirement numbers – let’s work backward. What money will you live on in retirement? For example:


  • How much money will you receive from Social Security? Play with different ages.

  • Will you get a pension? Contact your HR administrator and ask for a Statement of Estimated Benefits.

  • Are you collecting money from rental property?

  • Will you have a side hustle?

  • Will you have any passive income?

  • Will you have any inheritance money?


If you are just getting started and don’t have some of the above, the point is not to add stress. It is for you to get started…you can do this!


Let’s add some numbers here to illustrate this example. Let’s say you will have $1,500 from Social Security and/or your pension per month. You know that you need $3,333 a month, so subtract the $1,500 you will receive. The remaining amount is $1,833 – this is the amount you still need to bring in to pay your monthly expenses.


Let’s do the same activity as before. $1,833 x 12 = $21,996

Now, let’s multiply that by 25. $21,996 x 25 = $549,900


To cover your current expenses in retirement, you’ll need $549,900 if you don’t increase your expenses and you collect Social Security and/or your pension. But we aren’t finished yet. What if you have some investments already? We need to give credit to those as well. For this example, let’s say you have $100,000 invested. Your new target would be $449,900.


But first, here is the same information using the calculations described above, but in a picture form for you to look at. The boxes in yellow are the information you need to have before starting the calculations:


Here is the link for you to save a copy from Google Sheets or download to your own computer. You can save it as an Excel spreadsheet or PDF if you prefer. Completing this financial planning template will take you one step closer to retiring on your own terms.


How Much Do I Need to Retire?


These aren’t small numbers, but that’s the beauty of compound interest and time in the market. However, you must get started now! To understand how the stock market works and how we make money, see my post on How to Invest in the Stock Market.


Now that you have this information, go back to the sheet where you wrote down some of the things you wanted to do in retirement. This is the time to start thinking about any extra costs or savings of these items.


You Know the Amount of Money You Need – Now What?


Here is where things can get interesting from a math perspective with the amount of money you need to retire – your target retirement amount. There is an equation in finance called the 4% Rule. The 4% Rule is the amount of money you use from your investments to live on starting in the first year that you retired.


The 4% Rule is a guide and used for directional purposes only.


In the example above, when you subtract Social Security, pensions, etc. from the equation, you were left with the amount of $549,900 as your target retirement amount. If you calculate 4% of $549,900, it equals $21,996. The amount $21,996 is the money you need to bring in per year during retirement to pay your expenses after you minus Social Security, etc.


See the infographic – the numbers are connected.


What does this mean?


From a simple directional perspective, this is the amount of money you would live on forever. If the stock market has an average growth of 7%, you can still live on 4%.


This means that you are not touching the base $549,900 and only using the money that it makes on the stock market. This is how you live off your money in retirement in perpetuity and one of the ways we avoid never running out of money.