How Much Do I Need to Retire?

School of Financial Wellness

A person is writing a check and counting money with a calculator. The FINANCIAL FINGERPRINT™ logo by Meld Financial is present in the bottom right-hand corner.

Join us for our next Meld University webinar, Preparing For Long Term Care Expenses in Retirement on October 17th at 3:00 PM CDT with speaker Blake May, J.D., CFP®, Meld Financial.

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Retirement planning is a complicated issue and can worry even the savviest investor. After all, if there was a straightforward answer, a lot of financial planners would be out of a job. As more employers opt for employee contribution plans like 401(k)s over benefit plans like pensions, the management of retirement investments is burdening more employees. However, with the right strategy and a little patience, you can tailor a retirement investing experience that is right for your situation.

How Much Do I Need to Retire?

To retire comfortably, you need enough savings to produce the income that you will need during your retirement years. This calculation depends on many factors, and choosing the proper investments for your situation is critical to the success of your retirement plan.

So, how do you calculate how much savings you will need to meet your retirement goals? The simplest way is to enlist a CERTIFIED FINANCIAL PLANNER™ at Meld Financial who can create your FINANCIAL FINGERPRINT™. This proprietary process allows us to develop a comprehensive retirement plan in a single meeting. Here’s a little about how it works.

First, we estimate your retirement expenses and income.

The first step to calculating how much you need to save for retirement is determining what your expenses will be when you retire. A common, general estimate is 80% of the spending you would do pre-retirement. However, assessing your own personal situation may yield a much different result, especially if you plan on working on your bucket list.

The retirement income from your job is only one piece of your total income. Social Security, investment income, such as rental properties, and anticipated part-time work can all help you to meet your expenses. For those individuals who began saving late in life or who have big plans for retirement, some part-time income may be a part of the plan. Those who are fortunate enough to have adequate savings can leverage their investment income to cover their expenses while they live the good life.

Then, we calculate your Required Rate of Return.

For most people, projected retirement income will not cover their expenses during retirement, and we call this difference an “income gap.” By calculating the estimated annual income gap and then determining your projected retirement savings, we can determine the rate of return that will be needed from your investments to cover your income gap. We do this by dividing the annual income gap by projected retirement savings. This rate will be the return required to sustain your expected retirement expenses with just your income and interest paid on your savings and investments. We call this your Required Rate of Return.

In addition, maintaining your principal investment balance is crucial to a comfortable retirement. People are living longer and staying healthier, so stretching your principal as far as possible is more important than ever. If you do tap into your principal, your Required Rate of Return increases from that point forward. And, a higher Required Rate of Return may lead to risky investing needs and financial stress.

For example, say that you are a retired household who spends around $200,000 a year. Social security and other income bring your income gap to around $100,000 a year. If you only have $1 million in retirement savings that would equate to a Required Rate of Return of 10% on your investments. This would be a difficult target for anyone in the current economic environment, especially someone who is retired. However, bringing your savings up to $5 million would drop your Required Rate of Return to 2%, a more reasonable and less risky investing goal.

Time generally works in your favor when saving for retirement, but don’t forget about inflation.

Almost everyone knows about the power of compounding growth over time. Tweaking a retirement plan by just a few years could mean a difference in hundreds of thousands of dollars. However, time can also work against you in times of heavy inflation.

The purchasing power of your retirement can easily be halved over a 30-year period by inflation. So, a comfortable amount of money in present terms may have a drastically different value when you retire. You must not forget to account for inflation when calculating your retirement expenses, and therefore, your Required Rate of Return.

FINANCIAL FINGERPRINT™ can help you reach your retirement goals.

There is no one-size-fits-all plan for retirement planning. Some people may still have large purchases on the horizon when they retire, like moving to a warmer area or covering college expenses for their family. Others may take a more conservative path during their later years, and reduce their expenses dramatically. No matter your plans, it is important to plan your retirement contributions and Required Rate of Return around your own goals.

Working with a qualified team of financial professionals can help to alleviate the stresses related to retirement planning. If you’re looking for help saving and planning for your retirement, contact a member of our team at Meld FinancialOur team of wealth managers consists of financial, legal and tax professionals who will help you FINANCIAL FINGERPRINT™, and get you on the road to a successful retirement plan.

Why Meld Financial?

Meld Financial, Inc. is an independent wealth management firm located in Birmingham, AL.

We specialize in financial planning, investment management, employee benefits and executive benefits for individuals, families, trusts, foundations and institutions.

We provide independent and objective services melded with customer-driven financial goals.

Mark McGarvey - President - Meld Financial

“We will always recommend the same course of action we would choose for ourselves, given the same circumstances.”

-Mark McGarvey, President