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How Much Money do you Need to Retire?

Authored by Manning Wealth Management Featuring Reed Bermingham 

Retirement is an exciting milestone, but it’s one that often comes with a notable share of anxiety and uncertainty.

“How much do I need to retire?” is the ever-prevalent question that financial planners can’t help but meet with a smile. The question is both amusing and fortuitous. It’s amusing because it’s a simple inquiry yielding a rather complex answer for each individual, and it’s fulfilling because finding that personalized formula is exactly what we as wealth management specialists take pride in accomplishing with our clients.

The plain and simple truth is that there’s no universal equation for calculating how much money you need to save for a comfortable retirement. However, by understanding the factors that contribute to successful retirement planning, you can shed some of the uneasiness and begin to feel more confident as you prepare to exit the workforce.

Here’s what you need to consider before you can discover your magic number for retirement:

Basic Budgeting

When you retire, your life will change immensely. Meanwhile, the basics of budgeting won’t. You can simplify the science of retirement planning by approaching your finances the same way you do now: expenses vs. income. How much will you spend, how much will you bring in, and how much will you have left over?

Income after Retirement

Of course, retirement planning is never that simple. The middle component of the budgeting sequence—how much you bring in—is really the wild card to your retirement, especially with the ongoing decline of pension plans.

After decades of working and bringing home a steady paycheck, it can be extremely difficult to put away enough money for a 20- or 30-year outbound cash flow. Unless you’re retiring with a more-than-healthy nest egg that you know you won’t outlive, it’s ideal to secure other forms of income besides social security. In fact, according to the Social Security Administration, social security only accounted for 37 percent of income for individuals 55 or older in 2010.

Where will your other 63 percent come from?

“The more diversified your portfolio, the better,” says Manning Wealth Management financial advisor Reed Bermingham. “A balanced assortment of stocks, bonds and real estate investment properties can help you generate extra income that you could conceivably live on without dipping into your retirement fund.”

While bonds don’t necessarily provide the high growth potential of stocks, Bermingham points out that even a modest $100,000 bond yielding 5 percent generates a notable $5,000 of income per year.

Lifestyle

All retirement calculations are relative to how you want to spend your golden years. For example, someone retiring to a small rural home in Ohio will likely have much lighter expenses than someone living in a condo on Miami Beach. Not only do the homes themselves come with different price tags, the two locations (each with an equally appealing lifestyle in its own right) lie on opposite ends of the Cost Of Living Index.

The key to setting an accurate benchmark is to be honest with yourself.

“If you want to travel the world, don’t hide from that fact while saving,” says Bermingham. “Build those aspirations into your fund from the start.”

Everyone has their own vision for retirement. Before you can start planning toward yours, you need to first carve a clear perspective of the lifestyle that best fits your interests and financial capacity.

Inflation

Over the past 30 years, the U.S. inflation rate has averaged roughly 5 percent per year. That means that every year, everything is becoming 3.22 percent more costly, thus diminishing your spending power over time. To ensure that you don’t dip too far into your funds down the road, you should add this 3.22 percent yearly increase to your calculations. You also want to be sure that any given investment is yielding at least a 3.22 percent annual return; otherwise you could end up taking a loss on it.

Having Enough vs. Having Enough to be Comfortable

There’s a big difference between having enough and having enough to be comfortable. While this may seem like an elusive number to nail down, Bermingham breaks it into a simple two-part formula: core expenses and discretionary expenses. 

Core expenses are things you must pay, such as utility bills, basic living needs and a mortgage. The rest of your expenses, such as travel, fine dining and shopping, are discretionary. Someone who “has enough” can meet their core expenses with ease, but will have to remain diligent in managing their discretionary spending. Meanwhile, someone who has enough to be comfortable can incur discretionary costs more freely.

The Big Unknown: Medical Expenses

It’s no secret that medical expenses increase with age. And while Medicare certainly helps, it doesn’t pay for everything. According to a 2011 Merrill Lynch guide on health care and retirement, the average annual out-of-pocket health care cost for a 65-year-old in poor health was $4,450.

You’re probably thinking, “Well, what if I’m in good health?” Even so, by age 75, you can expect to pay $5,220 annually—not much less than the $5,635 someone in poor health will pay.

To a similar tune, a 2014 survey by Fidelity Consulting Services found that a 65-year-old couple without employer-provided health insurance will need approximately $220,000 to cover their costs for medical and dental care, long-term care and over-the-counter medications. This number skyrockets even further if you end up needing in-home care.

“The latter stages of life can send shock waves through your bank account,” says Bermingham. “If you’re not working in a civil servant profession that allows you to retire with full medical benefits for life, I usually recommend selecting a high-deductible plan and setting aside the deductible in a separate fund.”

According to Bermingham, you should also have a 6-month emergency health care fund on hand to cover any unforeseen hurdles.

Working after Retirement

There’s a generational shift in the way Americans are viewing their working lives. The idea of doing nothing is no longer the retirement vision; the digital age has made it much easier to launch and run a small business. Whether it’s reimagining an old hobby or maintaining a rental property, there are many ways to bring in money during retirement while still removing yourself from the daily grind. Aside from being mentally stimulating and financially rewarding, working later into life has been linked to living longer. One drawback to be aware of, though: if you generate a certain level of income while collecting social security, it will offset your benefit.

A Rule That Always Applies

There are many different “formulas” out there, some of which are often fairly accurate. But as Bermingham points out, “you can’t predict markets; you can only forecast them.” Therefore, he offers a piece of advice that echoes true for everyone:

“Save as much as possible, as young as possible, as often possible.”

Ideally, you want to start saving when you’re in your late 20s or early 30s. By age 35, you should have a well-organized plan with a steadily growing retirement fund.

How to Get Started

A financial advisor is equipped with the expert resources, knowledge and software needed to truly pinpoint your magic number for retirement. To begin building your ideal retirement plan, download this budget worksheet and contact Manning Wealth Management for an introductory consultation. You can also visit reedbermingham.com for more insights from financial advisor Reed Bermingham.

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The Financial Consultants of Manning Wealth Management, Inc. are registered representatives and investment advisor representatives with/and offers securities through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Manning Wealth Management is also a Registered Investment Adviser. Advisory services, fixed insurance products and services offered by Manning Wealth Management are separate and unrelated to Commonwealth.