When it comes to retirement, one of the most common questions we hear is:
“How much do I need to save for retirement?”
There are plenty of rules of thumb that try to answer that question. You may have heard that you should have a certain multiple of your income saved by a certain age, or that you need $1 million, $2 million, or some other large number to retire comfortably.
While these guidelines can be useful as a starting point, they don’t tell the whole story. There is no universal number that determines whether you’re ready for retirement. The amount you need depends on your personal situation, the lifestyle you want to maintain, the expenses that come with that lifestyle, and the assets and income sources you already have.
Start With Your Lifestyle, Not a Savings Benchmark
Instead of starting with an arbitrary retirement savings goal, start by asking:
“What do I actually want my retirement to look like?”
Your answer might include traveling several times a year, spending more time at a lake house, playing golf, helping children or grandchildren, dining out regularly, or simply having the flexibility to enjoy your time without worrying about every expense. The lifestyle you want comes with a cost. That makes your expected retirement expenses one of the most important pieces of the equation.
For example, someone who plans to live a relatively simple retirement may have very different income needs than someone who wants to travel extensively and maintain a more active lifestyle. That’s why comparing your retirement savings to a generic benchmark can sometimes be misleading.
Look at Your Assets and Income Sources
Once you have an idea of what your retirement lifestyle may cost, the next step is to look at the resources available to fund it.
These may include:
- Social Security
- Pension income
- 401(k) and 403(b) accounts
- IRAs
- Taxable investment accounts
- Cash and other savings
- Other sources of income
The key question isn’t simply “How much have I saved?”
It’s:
“How much income can my assets provide, and is that enough to fund the lifestyle I want in retirement?”
This is where retirement planning becomes much more personal.
Separate Your Needs From Your Wants
One of the most important distinctions we make when helping clients plan for retirement is the difference between needs and wants.
Your needs are the expenses that you must cover regardless of what the stock market is doing. Think about your mortgage or rent, utilities, groceries, insurance, healthcare, property taxes and other essential expenses.
Your wants are the expenses that provide flexibility and enjoyment, such as travel, entertainment, hobbies, dining out or larger discretionary purchases.
These two categories don’t necessarily need to be funded the same way.
Build Guaranteed Income Around Your Needs
Ideally, your essential retirement expenses should be supported by income sources that aren’t dependent on what the stock market does in a particular year. Social Security and pensions can play an important role here because they can provide predictable income throughout retirement. But many retirees have a gap between their guaranteed income and the amount they need to maintain their lifestyle.
For example, imagine your essential retirement expenses are $6,000 per month, but Social Security and a pension provide $4,500 per month. That leaves a $1,500 monthly gap that needs to be addressed.This is where your retirement assets become especially important.
Your retirement savings are building future income.
If your pension and Social Security cover your essential expenses, your retirement accounts can be positioned to provide the additional income needed to maintain the lifestyle you want.
During your working years, contributions to retirement accounts are building the assets that can eventually help fill the gap between your guaranteed income and your lifestyle expenses.
Let the Market Help Fund Your Wants
Investments in the stock market can fluctuate in value, which makes them better suited for helping fund discretionary expenses such as travel, hobbies, entertainment and dining out.
If your essential expenses are covered by predictable income, you may have more flexibility to adjust this spending based on market conditions. In a strong market, you may have more available to spend or reinvest. In a weak market, you may choose to reduce discretionary spending or delay certain purchases.
Retirement Readiness Is Personal
This is why we don’t believe there is one magic retirement savings number that works for everyone. Two people could have exactly the same amount saved and have completely different retirement outlooks.
Someone may have a pension and Social Security covering most of their expenses. Another may have no pension and need their investment portfolio to provide a much larger portion of their retirement income. Their savings balances could be identical, but their retirement plans would look very different.
Your retirement readiness depends on the relationship between:
Your lifestyle ? Your expenses ? Your guaranteed income ? Your assets ? Your retirement goals
That’s a much more meaningful way to evaluate whether you’re actually saving enough.
Turning Assets Into Lifetime Income
Accumulating retirement assets is only one part of the retirement planning process. Eventually, those assets need to be turned into income.
At NextGen Wealth Services, we help clients evaluate how their assets can work alongside Social Security, pensions and other income sources to create a retirement income strategy.
For some clients, that includes using a portion of their assets to create guaranteed lifetime income sources, helping cover essential expenses without making those expenses dependent on stock market performance. The goal isn’t to eliminate investment risk or avoid the market entirely. It’s to build a retirement strategy where your essential needs and discretionary wants are approached differently, giving you greater confidence about where your retirement income is coming from.
Retirement planning isn’t about reaching an arbitrary number. It’s about creating a plan for turning the assets you’ve accumulated into the income you need to live the life you want.
If you’re unsure whether your current savings are enough, we’d be happy to help you look at the numbers through the lens of your personal situation, lifestyle and goals.
Click here to connect with NextGen team to start the conversation.