What You Need to Retire and How to Get There

Retirement saving is hard to do. It’s made even harder by the fact that most people cannot earn enough over a lifetime to retire safely without taking on at least some investment risk. What you need to retire can seem a mystery.

It’s great to minimize risk, of course, but retirement savers often make the mistake of keeping most of their savings in cash, often in bank accounts. Yes, they’re insured and safe — but not from inflation. You need at least a 3% return from the bank just to keep up as the years go by, besides what you need to retire.

Imagine you have a pretty good job and can live on your income and manage to save some on the side. If you do that for a long enough period, it reduces your need to take on risk. After all, your money should be compounding along the way.

The target, then, is to save enough, invest conservatively but beat inflation and realize the time value of money from compounding to reach what you need to retire.

Here’s where the math can go a little nuts, so it’s time to think more simply about the problem. Let’s answer three basic retirement questions with back-of-the-envelope numbers on what you need to retire.

1. How much do I need to retire?

This is a pretty easy number to come by, if dispiriting to some. If you expect to have a relatively safe retirement income of $60,000 a year, you will need $800,000 saved up by the time you retire.

I say dispiriting because not many folks at the edge of retirement are anywhere near that kind of number. (We’ll explain how to get there in No. 2.) For now, assume you will collect, as a working couple, a payout from Social Security of $36,000 a year.

Your income gap is now just $24,000 a year, which you will draw from your retirement savings of $800,000 to close the gap on what you need to retire.

2. How much return do I need before retirement?

If your aim as a couple is to hit that $800,000 threshold (and this is by no means applicable advice to any individual saver), then you need to save. If you have 25 years to make that number, you need to save and invest about $12,000 a year, each year. If you have 20 years, the savings number target is $18,500.

If you have just 10 years to save, the number is $55,000 a year. Sounds impossible, but a couple in their 50s using 401(k) plans can put away up to $51,000, including matching from employers. Those using self-employment plans such as a SEP IRA also top out at $51,000, but you then can consider taxable accounts on top.

There’s a reason the government sets those numbers high. They want you to make it and not be destitute in retirement. As for return, each run figures a market return of 7%, compounded quarterly. That’s not an unreasonable expectation for a risk-adjusted portfolio with a decent asset allocation plan.

3. How much return do I need after retirement?

This is easy: What you need to retire is enough to live and grow your portfolio faster than inflation. One way to solve the puzzle is to lower your cost of living. Many retirees downsize their homes, move to low-tax or no-tax states or otherwise find a way to reduce spending.

You will, nevertheless, want to remain invested to some degree. Inflation has been tame for some time but doubtlessly will return. Sitting on loads of cash in retirement might feel safe, but it’s when you have decades of potential living ahead but no income that longevity risk kicks in.

Here, an income-focused portfolio that earns at least the historic inflation rate plus your spending needs is the ideal. Regular check-ins with a good financial planner can make the difference once you arrive at this stage of the game.