Financial Foundations #6 - Retirement
Retirement might seem like a far-off dream filled with beach chairs and endless golf… but if you’re getting close to that golden finish line, one big question is probably keeping you up at night:
"Do I have enough to retire?"
Don’t worry, you’re not the only one doing math at 2 a.m. on the back of a napkin. The good news? Figuring this out is totally doable and it doesn’t require a finance degree or a magic crystal ball. Just some simple steps, and maybe a calculator.
Step 1: How Much Money Will You Need in Retirement?
First, we’ve got to talk numbers. Don’t run away just yet!
Some say you’ll need about 70% to 80% of your current income once you’re retired. So if you're making $100,000 now, plan on needing around $70,000–$80,000 per year in retirement.
But this is just a rough estimate. If you’re super frugal and live like a minimalist monk, you might need less. If you’re more of a treat-yourself type who loves new gadgets, golf trips, or cruises…well, you might need more. Like… maybe all of it. Many plan to keep their current income level so they don’t have to drastically change their lifestyle. That’s ok too, you just have to plan for it!
Also, remember that Uncle Sam still wants a cut. When you withdraw money from retirement accounts like your 401(k), you’ll likely pay taxes. So don’t forget to factor that in. Retirement doesn’t mean escaping the IRS.
Step 2: Subtract Your Pension and Social Security
Next, it’s time to do some subtraction. Yes, the math continues, but hang in there.
If you’re lucky enough to have a pension and/or Social Security income, we need to take that into account as well. These two are like your retirement "starter pack."
For Social Security, head to the Social Security Administration’s website. (Just don’t expect it to be the most fun website you’ve ever visited.)
Here’s an example:
You want $140,000 a year in retirement.
You’re expecting $6,000 a month from your pension and Social Security—that’s $72,000 a year.
Now subtract:
$140,000 - $72,000 = $68,000
That $68,000 is the amount you’ll need to pull from your personal savings each year—aka your 401(k), IRAs, or that secret coffee can in the backyard (kidding… mostly). Of course, you have a retiree’s biggest enemy to still account for: inflation. But this is just a start.
Step 3: The 25x Rule
Now you can use the 25x Rule—a classic in the retirement world.
This rule says you should multiply your annual income need by 25 to figure out how much you should have saved.
So if you need $68,000 per year from your savings:
$68,000 × 25 = $1,700,000
Yep, you read that right. You’ll need about $1.7 million in retirement savings. Don’t faint! This number can seem scary, but keep reading. There’s hope.
Step 4: What If You’re Not Quite There?
So if your 401(k) is looking more like a kiddie pool than an Olympic-sized savings account, It’s okay. Many people find they’re a little behind and that’s not the end of the world.
Here are a few ways to catch up:
1. Cut Expenses
Will your house be paid off? Are there subscriptions you forgot you were paying for? (Looking at you, streaming service #6.) A leaner budget can mean you don’t need as much savings.
Think about expenses like gas to commute to work or other expenses that might go away if you are not working as much.
2. Work a Bit Longer
Not what you wanted to hear? Understandable. But working a few more years can add a lot to your savings, especially if your company has a 401(k) match. Plus, you can take advantage of catch-up contributions once you hit age 50.
Also, think of it this way: working longer means you can delay retirement, increase your social security check and avoid being bored two weeks in (glass half-full view).
3. Work Part-Time or Consult
You’ve spent years building knowledge. Why not do a little part-time consulting? Even a small monthly income can make a big difference. This will allow you fill any gap in your retirement plan and might open up some other options for you as well.
4. Talk to Us
We can help you sort through all this. Think of us as your financial GPS so you don’t accidentally drive your retirement plan into a ditch.
Also, the exercise above is a good estimate to get started. There are many ins and outs to retirement planning including which buckets to pull from (IRA vs. Roth, brokerage, etc.) in what years. We can help you sort through these options to make sure you get the most out of your retirement “pool.”
Final Thoughts
Retirement planning doesn’t have to be a stress-fest full of spreadsheets and headaches. Once you understand your income needs and use the 25x rule, you can figure out whether you’re roughly on track—or need to make a few adjustments.
Here’s the deal:
If you’re ahead of the game, great! Maybe you can retire early and spend your days golfing, gardening, or finally writing that novel.
If you’re behind, that’s okay too. You have options, and it’s never too late to make a smart move.
Remember: retirement isn’t about having the perfect number, it’s about having a realistic plan that is tailored to you and works for your lifestyle and goals. If you still have questions (or just want someone to tell you you’re doing okay), consider chatting with us.
Check out other Financial Foundations topics: