This may seem strange coming from a fellow who’s not yet forty, but I’ve been thinking a lot about retirement lately. Now that I’ve repaid my debt, now that I’ve begun to save money, I’m curious how much a person actually needs in order to retire. How do you know when you have enough?
Too many experts
It seems like every expert has a different answer. Some say that you need 70% or 80% or 100% of your current income. Others say that you need to calculate your “retirement number” based on actual expenses. 
There are experts who argue that costs rise during retirement. But there are those who cite figures demonstrating that costs fall.
Whom should I believe?
I’ve also been wondering what is retirement anyhow? For the past three months, I’ve been working from home, writing. This is work that I love. How is this different from retirement? Does it matter? What would I really want to do differently with my life?
To explore these questions, I’ve been reading books like The Number and Work Less, Live More. I’ve been browsing personal finance magazines and online forums. I’ve been watching programs like Retirement Revolution. None of it really helps. I know about the 4% safe withdrawal rate, and I understand that inflation is a silent enemy. Individual pieces of the retirement puzzle make sense to me, but the Big Picture is just as confusing as when I started.
When people ask me where to begin with stock market investing, I feel like the answer is obvious: start by making regular contributions to an index fund, and then expand to other investments as your knowledge increases. But this is only “obvious” to me because I’ve done so much reading on the subject that I’ve been able to develop a strong set of opinions. I haven’t done as much reading about retirement; I find the subject just as baffling as some people find the stock market.
Financial independence
I’ve decided that “when can I retire?” may be the wrong question, especially since I can’t even decide what retirement is. Instead I’ve shifted my thinking to financial independence.
Your Money or Your Life defines financial independence as “having an income sufficient for your basic needs and comforts from [sources] other than paid employment”. Financial independence is “having enough — and then some”.
To me, financial independence implies freedom. It’s the condition of having saved enough money that you can do whatever you choose. Whether or not you elect to keep working doesn’t matter — you have enough saved and invested to follow your dreams. If you’re financially independent — if you’re doing what you want — isn’t that the same as retirement, anyhow?
I have no idea how much money is “enough — and then some”. How do other people determine this? Do they determine it? Have you? What does retirement mean to you? Have you set a target figure that will allow you to stop working? What will you do then? What is your definition of financial independence?
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Retiring early is very important to DH and myself. His family health history is horrible (parents, uncles, and grandparents didn’t live to see 60) and I will not have him work all his life only to keel over dead three days into retirement.
Truthfully I’ve been too chicken to run the numbers. Thanks for that formula, Kevin. Time to bite the bullet.
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Financial independence to me is having money to do the things that are important to you. Retirement confuses me as well. I also wonder, will I still desire to work even when I am of retiring age. I know many seniors who work because they like to interact with people or just really find pleasure in what they do.
I personally am satisfied and happy with the thought of working yet having enough money in the bank to not live paycheck to paycheck. Living this way is what makes financial independence seem so desirable and needed. But it really all depends on your lifestyle and what makes you happy. Being able to make yourself happy without having to hold back can be defined as being financially independent. But that’s an intrinsic point of view.
Great post!
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First time poster here, but long time reader, I love what you are promoting here JD.
I’m 25 right now, but early retirement has always been a goal (thinking 50). I currently have ~$35k, and are on our way to ride the compounding wave. I found a great retirement calculator online which allows you to adjust different scenarios to get an idea of best case/worst case based on your current situation. The closer to retirement you are, the better idea you will have i think.
http://www.dinkytown.com/java/RetirementPlan.html
But as many people mentioned, living a happy and comfortable lifestyle up until retirement is important. And everyone’s definition of retirement is different. This calculator gives you flexibility to put in the numbers that work for your scenario.
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The general advice “out there” for saving for retirement is backwards,imo.
Everyone pretty much should be approaching it from max out 401k, max out IRA(s) annually.
Most will never even be able to do that (for a couple who do this, it would mean saving $42,000 a year).
Until they are able to do that, the question of “how much will I need” is irrelevant, because this should be the #1 priority for almost everyone out there.
It’s interesting to run numbers to see “what will be needed” but at the end of the day no one knows what unexpected circumstances may happen and when you are in retirement you will want to be able to take care of those unexpected circumstances.
This also applies to people who say “I like what I do, I always want to be able to work” but guess what?
That may not be the case as you get older. You may grow tired of working when you are in your 70s, or 60s, heck I know people in their 40s that are tired now (physically) of working.
Or you may have an age related disability that keeps you from your job (e.g. a stroke).
Save as much as you can, you won’t regret it when you are older.
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I’ve never come across online content regarding taxable accounts as they relate to early retirement. Even if a person isn’t maxing out both a 401k and an IRA, shouldn’t they also be saving outside those vehicles so they don’t get slammed with penalties?
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Re: #5
If you can retire on 2mil with health insurance, or 800k without wouldn’t you be better off self-insuring at that point?
Just set aside, say, $700k for self-insurance and you’re still ahead a half million dollars. Certainly medical bills can exceed this, but I imagine it’s extremely rare.
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Justin- It might be better to have the 700k, but lots of places jack up prices for things for the un-insured. Also, dental insurance for my husband and I is pretty much a must since we both have genetically terrible teeth. I’d want to have a nice safe withdrawal of 2-3% of total to take care of everything…
Also, I’m fairly conservative in my investing, so I’m not expecting huge returns either, hence the 2 mil. The 800k is a very low estimate for me, and we certainly wouldn’t be able to live a very extravagant lifestyle (about 2k per month, which is 200 more than we have now budgeted).
If 1 mil dropped into our laps tomorrow, we’d likely try to figure out a way to retire now, even if it isn’t that magic 2 mil number. We have a lot of years left however (27 and 28 years old), and I don’t want to be old and tired and not have any money for comforts. (Or food, or shelter).
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Having benefits helps a lot when you get sick.
My mom was a housewife all her life and lived modestly on alimony after her divorce.
Unfortunately, the disease she developed (a rarer, non-Alzheimer’s dementia – onset in your 40s) meant she had forgotten to pay for private health insurance by the time she needed it.
Diagnistic costs were several thousand out of pocket.
She was unable to stay in her home because of her wandering (common in dementia) and had to be placed first in a secured assisted living, then rapidly needed nursing-level care (for most of her illness).
Even though she had no acute or chronic medical needs (no drugs, etc.), she required nursing-level care just to have those activities of daily living (ADLs) like feeding, cleaning, and changing done for her – ran her about $150/day at private pay rates.
I later found a much smaller (12 resident), more home-like (it was a converted private residence) facility for about $100/day, where she spent the final 6 years of her life.
Everyone can do the math, I think.
I’m piling up as much cash as I can – mom got ill well before the age anyone would have considered purchasing long-term care insurance.
Note that LTC insurance probably would *not* have paid for her last facility (though it was a much better fit) because it was not a certified skilled nursing facility.
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Whether your goals are to retire early, achieve financial independence, or anything else, options on preparing for retirement are dwindling. Social Security is in a precarious position and pensions are going the way of the dinosaur. Personal savings seems to be the main option open to people, but half of Americans don’t have any access to workplace retirement savings programs. AARP has supported an effort to bring automatic IRAs to the workplace and Massachussetts Congressman Neal has voiced his backing for this idea on AARP’s blog ShAARP Session.
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This is a topic I’ve put a lot of thought into and is the main thing I’m working towards financially. I’d really LOVE to be financially independent so I don’t have to worry about work or fear a random layoff.
Figuring out exactly how much you need to retire is a pretty complicated thing with a variety of ways to do it. I don’t think theres any one way to get the ‘right’ answer but a variety of ways to ballpark estimate it.
For starters you could throw “retirement calculator” into google and it will give you several calculators to play with. Throw some numbers into a few of those and see what they tell you.
There are some variables in the equation that are hard to figure decades in advance like medical costs and social security.
I’ve been looking at fixed annuities a bit in my blog. One way to look at retirement is to figure your annual expenses, add a % margin for safety and then find the cost of an inflation adjusted fixed annuity. For example if you figure you have $60k annual expenses, then add a buffer to make it $75k then someone 50 years old could buy an inflation adjusted annuity to pay them that for life at a cost of $2M.
Jim
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My magic number is only $200,000. I’m there. I’ll retire in a year at 55 and live off the interest only from that til 59.5 when my $450/mo pension kicks in. And a $300 property sale income. If I needed to, my pension can start at any time after 55. Then at 62 the $800 soc.sec. kicks in, and I’ll be living high on the hog.
(But if SS goes away, I’ll still be fine!)
I only want about $1100/month – and that’s living comfortably. That’s more than I take home now! I’m debt free and am just finishing up the remodeling on the house, new roof and windows, etc, so that the house should be fairly maintenance free for the next 50 years hopefully.
In the meantime, last year I cut my hours to 32/week – 4 days – and consider myself semi-retired… I want quality time to spend with my grandchildren who live nearby
Including volunteering at their schools and going on their field trips. (Their mom’s going to college, and working, so can’t do it right now)
Years of living frugaly have taught me that I don’t need much money to get along just fine.
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I think you may be over analyzing it my friend.
for myself all I need to do is pay off my apartment (within three years) and I can then quit my regular job and do what I love to do to generate income. I call this “Financial Comfort”.
I can then work doing what I love and once my savings hit $250,000, I then never have to work another day in my life. I could literally sit in a beach for the rest of my life at this point. I call this “Financial Freedom”
After this, if I choose to continue working/investing and reach $2.5 million in savings/investments, I could then do literally whatever I want, whenever I want e.g. sail around the world in a luxury cruise ship. I call this “Financial Abundance”.
my advice is: keep it simple. pick a target and go for it.
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There is no magic number. Once you hit what seems like enough you will think of other possibilities. What if one of us has to spend several years in a nursing home? What if that grown child who has always struggled needs help? What if runaway inflation eats at my pension? What if Medicare or Social Security that you are counting on isn’t there for you – or the benefits are reduced? What if one of us gets sick and we want to try a new therapy that our insurance considers experimental and won’t cover? How much would you need for all of that?
I’m semi-retired at 55 and my husband (62) retired from his teaching job and took another job in another district. He isn’t doing the things that used to take so much time – coaching, extra duties, summer school teaching – or continuing education classes for him. So I’d consider him 1/3rd retired. We do a lot of fun things but we are still saving and though I thought we’d have enough to fully retire early, I see a lot of things that might prevent that. Some of these are inflation, volatility in the stock market, a pension that does not include a cost of living increase, difficulty finding affordable health insurance for older people, … Still, if we had a reason to retire tomorrow, we could. We’d just have to make different choices. There are lots of things that we enjoy that aren’t very expensive – and even result in some savings – the garden, volunteering at the local nature center or theater… We’d rather have a bigger buffer and generally enjoy our work and feel productive. So are we financially independent? Only the very wealthy can say that they could weather all storms without returning to work. We could handle most possibilities, but not all.
I think the only way to face this is to recognize the need to be flexible and have an alternative plan or two. If the amount of money that you thought would be enough is not, get a part time job – or even go back to work. I know a man who made his living well into his late 50’s as a potter working for himself. For his last decade, he decided that he needed a job with health insurance because individual policies had become too expensive. He retired from being a potter. This isn’t a tragedy. He had all of those years of doing what he loved and working for himself. He still makes some special pieces. One decade of working for someone else is a change of pace and something new for him, even though it resulted from necessity.
Being without debt, having a reasonable amount of savings based on your best predictions of the lifestyle you’d like and possible needs, and having some flexibility if it doesn’t work out is about the best that we can hope for.
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@Michele on #55:
You don’t have to worry about penalties if you retire early. There is something called a Section 72(t) election which will allow you to avoid penalties on your IRA distributions. It basically requires you to take substantially equal periodic payments under one of the IRS’s payment options. See the following website for detailed information:
http://www.retireearlyhomepage.com/wdraw59.html
Or you can just read the Treasury Regulations, but that’s pretty boring and very unclear.
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In line with the subject of this post, can anyone recommend “non-traditional” resources on retirement planning?
Although I’m in agreement with much of the “Your Money or Your Life” credo, I just don’t think the 30-year treasury bonds for income make sense in this economic environment — even if you have enough capital to generate enough interest at current rates, what about the very real (in my opinion) of the dollar tanking in value?
I’d appreciate any leads or suggestions…
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Just to reply to “how much is enough”, I believe the amount that can make you happy is “enough” and more than that will make you greedy
It doesn’t matter it’s a super sport Ferrari or a used Honda that makes you happy, either of each that does the job, will be adequately enough.
I hope I can achieve enough for myself too
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