How Much Will You Need to Retire?

Well, our oldest daughter, Maeve, is off to college, and I am not going to lie to you . . . I really miss her. She’s my buddy. But, we couldn’t be happier and more excited for her. Jill and I helped her get settled in on move-in day. It was chaotic and frenzied, and there were plenty of tears (from us) and rolled eyes (from her), but it was also a lot of fun. There was a get-together for first-year nursing students and families on campus. Maeve got to meet some of her incoming classmates for the first time, and we got to talk with some of the other parents.

Jill and I got talking to a great couple from Connecticut who were also dropping off their firstborn, also a daughter. Sam and Diane, as I’ll call them, are a hard-working couple in their early 50s who own and operate an Irish pub in their town. When I told them what we do, Sam asked the same question I get from a lot of folks: “How much do you think we will need to retire?”

Sam told me that while they’ve scrimped and saved, they have no idea how much they’ll actually need once they retire. If you’re in the same boat, you should know that you’re in the majority. In fact, it turns out that fifty-six percent of Americans are in the dark about what they’ll need for retirement, according a recent study from Northwestern Mutual. But that doesn’t mean you can’t figure it out. With our time together this week, I would like to share with you some guidelines I suggested to Sam and Diane to help point them in the right direction.

Their first step was to understand their current expenses. The goal here is to get an accurate understanding of how much they’re spending each month. I told them to factor mortgage payments, property taxes and insurance, utilities, and home maintenance costs. I asked them to consider how much they spend on food each month – not just the grocery bill but dining out as well. They must factor in transportation costs, including car payments, fuel, insurance, and maintenance. Health care and insurance costs are often sizeable expenses, too.

They should consider loan payments, credit card bills, and in Diane’s case, student loans she accrued to get her Master’s degree. They’ll want to factor in annual, quarterly, or other recurring costs that may not happen monthly, but still have a significant impact on their overall expenses. I mentioned that they need to factor in what they spend on entertainment and vacations, charitable contributions, and any other recurring payments. They also need to account for recurring subscriptions to magazines, newspapers, and all those Internet services we all love, such as Netflix and Hulu. Leave nothing off, was my advice. Again, the goal here is to understand accurately what they spend each month.

With that in hand, it’s essential to then understand that expenses often change in retirement. Some costs, such as health insurance and health care premiums, rise dramatically – especially once you can’t count on an employer-sponsored plan to help defray those costs. Other expenses, such as transportation and clothing costs, typically go down. Generally speaking, we often recommend that we assume our expenses in retirement will be roughly 80% of our current expenses.

Of course, the actual number will vary widely depending on your specific financial situation, and each household is different. For Sam and Diane, who have relatively average expenses, that 80% figure came to about $4,200 per month.

The next step is to understand how inflation will affect your purchasing power over time. Ben Bernake, ex-Federal Reserve Chairman, often referred to inflation in retirement as “…the silent killer”. It’s critical to know how inflation will affect the money you spend in retirement. It’s also a consideration when establishing saving goals during the wealth accumulation phase. Sam and Diane are optimistic that they’ll make it to or close to Social Security’s Full Retirement Age (“FRA”). That timeline gives them another 15 years to accumulate more wealth accumulation and reduce their debt before they reach retirement.

Assuming a 3% inflation rate, the couple’s total estimated monthly expenses will rise to about $6,544 by 2034, when Sam and Diane expect to retire. With that monthly estimate in hand, Sam and Diane estimated that their annual expenses in retirement to be $78,528. The Social Security Administration says that a man turning 65 today can expect to live on average until he is 84, or for a woman, 85. That means you need to consider that retirement savings and investments, combined with pensions, Social Security and other income, should last roughly 20 years or more.

Assuming a 20-year retirement, that means that Sam and Diane can expect to spend about $2,251,907 before their retirement is over. At 65, they will be eligible for Medicare, which will help control some of their health care costs. They anticipate that Social Security will account for about 40% of their post-retirement income, as well. What remains is their responsibility, and it’s a big nut to crack.

Many folks I meet with are like Sam and Diane. They hope to make it to Full Retirement Age (FRA) to acquire 100% of their benefits from Social Security, which means working until 66 or 67 depending on their birth date. But that’s not what typically happens. According to a Federal Reserve survey, the average retirement age for Americans is actually 62, well before one is eligible for FRA benefits. So when estimating Social Security benefits, it can be appropriate to model what will happen if you fail to make it your FRA – if you have to retire early, whatever the reason.

Sam and Diane have a long way to go before they reach retirement. With smart savings, investments, elimination of expenses like their mortgage, and the proceeds from selling their pub, Sam and Diane now have a goal to reach for and a plan to do so.

Folks, understanding how much you’ll need in retirement is only the first step to a successful retirement system. A successful system must incorporate sound income planning to ensure you don’t run out of money; an investment plan that includes downside risk mitigation triggers to help manage volatility and advanced tax planning. That’s why it’s important to consult a retirement specialist. Find out if you’re on track, and come up with a plan that helps you reach your goals.

“Cheers,” as it were, to my new friends Sam and Diane for getting a better handle on their future retirement goals. Of course, these are very rough “back of the envelope” calculations . . . but it is a start. I will see them in October for parent’s weekend with Maeve. And you know, I can’t wait.

Be vigilant and stay alert, because you deserve more.

Have a great week!

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC
Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at

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