What is your magic retirement number?
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[August 03, 2023] By
Chris Taylor
NEW YORK (Reuters) - How much money do you really need for retirement?
One guess is $1.27 million, a new survey from Milwaukee-based
Northwestern Mutual shows. But there is no 'Magic Number' for everyone.
After all, retirement may be decades away, subject to variables such as
life events, inflation, stock market returns, and savings rates.
That is why such estimates are all over the map. One Charles Schwab
survey put the figure at $1.7 million, and LendingTree estimated $1.07
million.
Even within Northwestern Mutual's annual Planning & Progress study,
there are wild discrepancies: Those in their 50s said they would need
$1.56 million, while those in their 60s estimated $968,000, and
20-somethings said $1.2 million.
Inflation is nudging overall estimates higher and higher. High net worth
individuals, for example, estimate needing $3 million for retirement.
"Everything is costing a bit more," noted Chris Collins, a wealth
management adviser who handles private clients for Northwestern Mutual.
How can you come up with your own 'Magic Number'? Here are a few
pointers from financial experts.
CALCULATE YOUR INDIVIDUAL TARGET
Having a savings target can help, for motivation if nothing else. But
just as with real estate, national averages do not mean much.
What matters are personal factors like your local cost of living,
retirement lifestyle, and if you still owe anything on your house.
In other words, "there is no magic number," said financial planner
Ashley Folkes of Hoover, Alabama.
To arrive at something which makes sense for you, try advanced
retirement calculators such as those by SmartAsset or Bankrate which
take multiple factors into account.
WORK BACKWARDS FROM WITHDRAWAL RATES
Retirement planners often cite the "4% rule": To make your money last,
do not take out more than 4% from your total balance every year. Some
number crunchers say 5% annual withdrawals should be fine, and some say
3% to be safe.
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U.S. dollar banknotes are seen in this
illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File
photo
But if 4% is a good general target, work backwards from that, said
Bradley Lineberger, a financial planner with Seaside Wealth
Management in Carlsbad, California. "A portfolio of $1 million could
safely distribute $40,000 per year of income, and continue to grow
over time so it won't run out."
That, plus Social Security income, would put you on solid ground. If
you want real retirement comfort, aim even higher: One recent
Bloomberg investor survey put the dream figure at an eye-popping $3
million to $5 million.
All survey estimates have one thing in common: They are all in the
seven figures.
REVISE AS NEEDED
The target figure may be quite different from the reality. While we
would all like to reach the $1.27 million goal in the Northwestern
Mutual study, the Federal Reserve's most recent Survey of Consumer
Finances in 2019 shows retirement savings average around just
$65,000.
Your target may also change with life circumstances, earnings,
spending and other factors.
Many steps can bring you closer to your 'Magic Number.' You can
invest to boost annual returns, sell your house and downsize to cut
costs, delay Social Security to get bigger payouts later, work a few
more years, or move to a lower-cost area with no state taxes.
"Your target will likely shift as your life changes," said Adam
Hubert, a financial planner with RW Baird in Canonsburg,
Pennyslvania. "It's a simple question – but with a complicated
answer."
(Reporting by Lauren Young; Editing by Richard Chang)
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