Will my retirement funds last?
Saving for retirement: how much is enough?
This is an important question, rooted in the Biblical principle of counting the cost before pursuing a particular course (Luke 14:28-32). And like many other important questions, the answer is… it depends on many things.
But all those considerations ultimately boil down to just a few categories:
Duration
The projected length of your retirement.
When will your retirement begin? Put more practically, when will your working income cease? Many have a choice in this respect, but not all. What options do you have?
When will your retirement end? In other words, how long do you plan to live after retiring? Of course, no one knows how long they will live, but that doesn’t mean we shouldn’t pursue wise plans based on statistical and other relevant information.
Income
Your anticipated sources of funds during retirement.
What sources of residual income, if any, will you have during retirement? This includes things like social security, pension, rental income, or interest earned on financial investments.
What other financial benefits will you receive during retirement? This includes things such as Medicare and Medicaid.
Expenses
Your estimated uses of funds during retirement. This is probably the most crucial consideration, as it’s typically the area we have the most control over.
What lifestyle do you hope to sustain during retirement? Your geographic location, housing situation, travel aspirations, charitable intentions, and more are included in this question – all significant stewardship considerations requiring much thought and prayer.
What health care expenses do you anticipate, and how will you handle the unexpected?
What tax liability do you anticipate, and how will you minimize that?
And don’t forget to account for inflation!
The answer to the question “How much savings is enough” can be expressed as follows: the amount by which estimated expenses exceed anticipated income over the projected retirement period.
Before diving into the specifics of your particular situation (and you should definitely do so at some point), it’s worth reflecting on a couple of rules of thumb that many have found helpful:
Save at least $500,000 for retirement. This may seem like a lot of money but remember that your savings are helping to fund your lifestyle over potentially many years. If you’re already well on your way to this amount, keep up the excellent work! If you’re behind the curve, don’t lose hope – there are ways to get back on track. In either case, numerous possibilities exist for simply stretching your savings during retirement through smart money management.
Follow the 4% rule. This popular retirement-planning strategy was introduced by William Bengen in 1994. The rule suggests that retirees should withdraw 4% of their retirement savings balance annually, adjusting the withdrawal amount each year for inflation.
These rules of thumb are good starting points in your planning process, but they are no substitute for the experience and insight of a trusted financial advisor. If this is a conversation you’d like to begin, Orchard Alliance is standing by to help.