How Much Will You Need to Retire?

Most people have a goal of saving a specific lump sum before they retire. A survey by the Transamerica Center for Retirement Studies reveals that most workers think they need about $500,000 to retire. 

In a 2019 survey by TD Ameritrade, 58% of American believe that $1 million is enough to retire. 

So how much will you need to retire? 

The answer is… it depends! 

It depends on multiple factors:

• Your retirement age
• Other sources of income
• Your location
• Your health
• Expected return of capital on your investments
• The estimated inflation over the remainder of your life
• The strength of your healthcare insurance
• Your standards of living
• Your dependents
• Your marital status
• Future inflation
• The size of your mortgage
• Very importantly, your life expectancy.

As you can see, this is not as straight-forward as one might think… 

The end result will vary greatly on each individual. 

In addition, you can control some factors (e.g. your location) and not others (your life expectancy). 

Therefore, we’re going to have to make multiple assumptions to get the conversation started. 

Before we start, are you aware of the 4% rule? 

It’s a rough rule of thumb used to determine how much you can safely withdraw from a retirement account each year. The goal is to provide a steady income stream, while maintaining your account balance. That number is highly controversial, yet commonly accepted. But let’s be generous and use 5% to simplify the math and make your retirement more comfortable. 

Now let’s say you do accumulate a net worth of $500,000 to match the Transamerica survey. 

If you withdraw 5%, that means that you need to live on $25,000 per year. 

Can you live on that amount? Can you eat out? Pay your mortgage or your rent? Travel to Malta or South Africa? Travel to visit your grandkids? Help your kids with a down payment? 

OK let’s now say that you build up your savings to $1 million to mimic the Ameritrade survey. 

If you withdraw 5%, it means that you need to live on $50,000 each year. 

Could you do it? 

Will your expenses decrease? 

An important factor to consider is a controversial assumption: that your cost of living will decrease significantly in retirement. 

For years, experts have claimed that your expenses will decrease in retirement: no more commuting to work, no more expensive work clothes (they clearly weren’t thinking of veterinary professionals wearing scrubs all day!), no more mortgage (a huge assumption), no more kid-related expenses. 

If your goals in retirement are to watch reruns of Friends and Oprah, and fish in your own pond, then the experts are likely correct. Your expenses will decrease. 

But if your plan is to golf in Ireland, scuba dive in Australia, film bear cubs in Alaska, build houses in Kazakhstan, or hike the Himalayas, then there is a good chance your expenses will be the same or higher during retirement. 

In addition, your healthcare expenses will eventually go up – significantly.

Save like crazy 

The size of your retirement nest egg will clearly depend on your savings rate and how smartly you invest. An interesting study tells us how much we should have saved at what age. 

Fidelity published these benchmarks, based on a 15% savings rate, starting at 25: 

By age 30, you should have saved 1 time your annual salary. 

Age 40 – 2 times annual salary. 

Age 50 – 4 times annual salary. 

Age 60 – 6 times annual salary. 

Age 67 – 8 times annual salary. 

Keep in mind that these guidelines are based on countless assumptions. It’s just an easy rule of thumb. 

So what’s the moral of the story? 

The advice is always the same, there are no magic tricks here. Take care of your health, start saving early, save as much as possible, spend reasonably, choose the right insurance coverage and invest wisely.

Phil Zeltzman, DVM, DACVS
Meredith Jones, DVM
Co-Founders of Veterinary Financial Summit