Created: August 13, 2020
Modified: September 9, 2022

Episode 12: How Do I Know I Have Enough Money to Retire?

Thank you for joining me for Episode 12 of my Money Wisdom Question Series, where I film answers to common financial and retirement investment questions. Today I’m answering the question, “How do I know how much money I need to retire?” Will, what I have saved be enough?

2 Questions:

  1. How do I know how much money I need to save?
  2. Will what I have be enough?

Determine Your Amount of Retirement Income:

The first thing you have to do is get a handle on how much retirement income you want. The best way to do that is to say, “If I was retired today, this is how much money I want coming in every single month.” While you’re doing this, forget about inflation and everything that you’ve already saved.

Figuring out this number will be the money coming in every single month that you can spend. Let’s say your number is $10,000 a month. Then what you have to do is project out to when your retirement date really is. Let’s say it’s 10 years from now. You’re going to need to save more than $10,000 a month because of inflation. During that 10-year period, the cost of goods and the cost of services that you buy will go up. So, maybe instead of $10,000 a month, you will need $15,000. Again, that’s an arbitrary number.

Determine Your Rate of Return:

Now, you have to go back into how much do you have saved? What are your guaranteed sources of income? Project out what rate of return you’d get on your savings and then what’s your withdrawal rate.

Rule of Thumb:

It gets a little complicated, but here is a pretty good rule of thumb:

If you want $10,000 a month when you retire, pretend you have no guaranteed source of income no Social Security no pension, you need to have somewhere around $2 million. Maybe $1.5 million or so saved. But you can reduce that much so don’t become discouraged. You can reduce that much by any kind of Social Security that you have. If you’re married your spouse may have Social Security. If you’re a teacher and you don’t get Social Security, you might get a pension.

Conclusion:

It’s not that you need your savings to cover the entire $10,000 a month. You need your savings to cover the shortfall between your guaranteed sources of income and what you want up to that $10,000 a month.

It’s hard to answer that question on the fly, but I wanted to give you a general rule of thumb. You figure whatever lump sum you’re going to have will generate between 5 to 7 ½ percent interest. Again, you might be spending it down. 5-7 ½ percent is what you can probably earn reasonably on retirement savings without running out of money in retirement (those are ballpark numbers).

Thanks for joining me and I hope you found this information helpful! P.S. If you enjoyed this topic and you want to hear more, you’ll love this blog article where I talk about a similar subject.

P.P.S. Feel free to submit questions here for a chance to have them answered!

The content is provided for informational purposes only and is not intended to serve as the basis for financial decisions. You should consult with a financial professional to discuss your unique personal situation. 
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