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How Much Do You Need to Retire?

The number one question we get from clients and friends at Keen Wealth is, “How much money do I need to retire?” But that’s not the question we help our clients answer when we’re working on their financial plans. Contrary to all the late-night TV and internet ads, there’s not some magic number to hit, no secret formula for combined savings, assets and investments that’s going to guarantee a secure retirement.

So, on today’s show, we work through our preferred version of our most common question, which is: “How much do you need to live on in retirement?” We also apply this question and our checklist-driven process to one listener’s scenario for an insightful example of what having enough to live on in retirement can look like.


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Determining How Much You Need to Live on in Retirement

Shifting from saving to spending.

After decades of disciplined saving and investing, some of our newly-retired clients struggle to transition out of that savings mindset into a reward mindset. Some of these folks have plenty of money saved and should have little fear of running out of money in retirement. Yet they may be stuck in savings mode and end up living much too conservatively in retirement, sacrificing not just their happiness, but in some cases, their comfort and health.

My Keen Wealth team doesn’t tell clients that they “need to start spending more,” or “should start spending more,” or anything like that. Instead, we try to give our clients “permission” to let go of some financial anxiety and stress and enjoy the rewarding life that their assets can provide.

Start with 75%.

A common number you’ll see floating around is that retirees only need 75% of their pre-retirement income. That’s a good starting point, but it’s an imperfect metric for a couple reasons.

First, is that 75% pretax or after-tax? For most folks, taxes go down in retirement. You most likely won’t be earning as much taxable income because you’re no longer drawing a salary, and since you’re not on anyone’s payroll anymore, you won’t be paying FICA taxes.

Second, 75% is a hard number that anticipates your life, your ROI, and your withdrawal rates are going to progress in a straight line. The markets, and retirement, just don’t work like that. Volatility will affect your savings, investments, and withdrawal rate. You might plan to spend more early in retirement for travel, relocation, and hobbies, and then less as you settle into your golden years. An unexpected health problem or home repair might create a major expense.

So, take that 75% figure with a grain of salt. However, if you’ve been working with a fiduciary advisor and following a financial plan, it is true that you probably won’t need as much money to live off of in retirement. Your taxes will go down. Your daily transportation expenses will go down because you’re no longer commuting to work or shuttling kids around. Once you transition to Medicare your monthly health care premiums will probably be lower. Professional expenses like office wear will stop. And your retirement savings contributions will stop because … well, because you’re retired! It’s time to stop saving and start enjoying!

All that adds up to – roughly – a 25% reduction in your expenses.

Make a spending plan.

But the key word here is “roughly.” Just saying, “I’m going to spend 25% less than I used to” is not a good way to think about how much you need to live on in retirement!

No two retirements are the same. Some retirees travel constantly. Some retire to the backyard garden. Some retirees sell the family home and move out of state. Some retirees keep earning via part-time jobs or new businesses they start.

Once you and your fiduciary advisor have figured out what your retirement income and withdrawal rates will look like, you need to do something that you might never have done before: make a spending plan. This is especially critical if you’re moving out of state. The tax situation and cost of living in your new state of residence might be very different than where you live now. You’ll also need to make sure you select Medicare plans that get you the coverage you and your spouse need in your new home, and account for any additional medical expenses like specialists or prescription drug coverage.

Housing costs, health care premiums, utilities, subscriptions, vehicles, groceries, entertainment – get it all down on paper. Sure, the final numbers will probably be less than your expenses while working. But figuring out what you need to cover your essential living expenses will bring you some peace of mind if you’re worried about running out of money. Budgeting will also give you a more realistic idea of what you can afford to spend on “reward” items like that dream vacation you’ve always wanted.

Plan for the long run.

As mentioned above, most folks find that their retirement goes through phases: The Go-Go Years, the Slow-Go Years, and the No-Go years. At Keen Wealth, we want to make sure that our clients have the resources they need to enjoy each phase of their retirement. We want to see our new retirees getting out in the world, trying new things, and seeing new places during the Go-Go Years. And as they start to slow down, we want to make sure our clients are comfortable, well cared for, and satisfied with their legacy planning.

No, I can’t give you a one-size-fits-all number or percentage that’s going to make that happen for you. But my team at Keen Wealth can do something better: create a financial plan with personalized scenarios to help you answer your retirement questions.

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Got a question or comment? Email it to me and we'll get back to you or call our office at (913) 624-1841. 

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

KWMG, LLC’s dba Keen Wealth Advisors (“company”) is an SEC Registered Investment Advisor located in Overland Park, KS. The company and its representatives may only conduct business in those states where registered or where excluded/exempt or from licensure. For registration information please contact the SEC or the state securities regulators for the states where the company is notice filed. A copy of the company ADV is available upon request. Advisory services are only offered to clients or prospective clients where the company and its representatives are properly licensed or exempt from licensure. No advice may be rendered by the company unless a client service agreement is in place. This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy and is for illustrative purposes only. Clients and prospective clients must consider all relevant risk factors involved with each strategy, including costs or fees, and their own personal financial situations before trading.

The views outlined in the book, Keen on Retirement Engineering the Second Half of Your Life, are those of the author and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.

The Amazon Best Seller ranking listed on marketing materials is specifically referring to Best Seller rankings for the Kindle Top 100 Paid Lists under the subcategories of: Budgeting and Financial Risk Management, based on data as of September 5, 2019. Amazon rankings although relevant on how a product is selling overall doesn’t necessarily indicate how well an item is selling among other similar items or similar item categories. Amazon may choose the most popular categories or subcategories within which an item has a high ranking to determine its best seller rankings. These rankings are updated hourly and as a result, should be expected to fluctuate as such. Keen Wealth Advisors and Amazon are not affiliated entities. 

The Steve Sanduski Advisor Network, Belay Advisor, LLC and other third-party contributors to our blogs and podcasts are not affiliated with Keen Wealth Advisors. 

For additional details on Keen Wealth Advisors, please visit https://www.keenwealthadvisors.com/important-disclosures.

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