This is a question I’m asked a lot. My answer is always, “it depends.” The key for me is you don’t want to run out of money before you run out of life. I always keep this in mind as I make recommendations for how much you’ll need.
Here are some questions you might want to answer along the way:
How long will you live?
This is probably the hardest question. First, you have to think about your death. Second, you have to estimate what advances we’ll have in medical science. Because this question is a hard one, it’s where I like to start.
If you talk with a life insurance company they might tell you that if you’re alive at 65 your life expectancy is about twenty years. If you’re in good health that number will be higher. If you have health issues it might be shorter.
When will you retire?
If you plan to retire at 55 years old you’re going to need much more money than if you retire at 70. The longer you’re going to be out of work, the larger the nest egg you’ll need.
If you hate what you do, you’ll probably want to retire earlier. If you’re like me and love what you do then retirement may not even be on the horizon. With most people I see, it’s answering the question about how much you like the work you do that helps you figure out when you’re going to retire.
Will you work in retirement?
If you stop working does that mean you’re really going to stop working? Would you consider being a consultant a few days a week? Would you think about starting work in a different industry? For some people changing jobs after they officially retire is part of their retirement plan.
If you plan to work part-time when you retire, you’ll need to save less money. Let’s be clear about this, if you plan on working part-time and you’re not saving today you’re going to run out of money fast. Working part-time is not an excuse to not save. It’s only a way to fill your time and reduce, not eliminate, the amount of money you’ll need to save.
How much are you saving?
If you’re saving 10% or more of your salary and you’re under 40 years old, there’s a reasonable chance you’ll have enough for retirement. This isn’t a promise; there are so many other variables in the mix that it’s just a rule of thumb.
If you’re under 40 years old and you plan to retire at 65, that’s a long ways off. There are likely many things that could happen that could de-rail your plans. That’s why you have to review your plans on a regular basis.
How are you investing?
The final question you want to answer is what sort of investments are you using for your retirement. Conventional wisdom holds the younger you are, the more heavily weighted you should be in stocks. As you get older, that same wisdom says you will want to lighten up your equity exposure and increase the percentage of your savings in bonds and other fixed income investments.
That is certainly one way of looking at it. We would rather have you think about your investments as buckets on a ladder. You change investments between the buckets depending on what happens to your investment portfolio. In good years, you’ll take more money from equities and on bad years from your cash bucket. Using this system often helps you have a higher level of safety in your portfolio.
At the end of the day, it’s about having enough money for retirement. These four questions won’t give you all of the answers. They will help you think more intelligently about your retirement and what’s possible.
We have a special report on transitioning into retirement. This report will help you think about the steps you should take as you move from working to retirement. I hope you find the report useful in your thoughts about retirement.