How Much Do You Need to Retire Comfortably? (Key Benchmarks and Milestones Explained) (EP.188)

0:28We all need to make smart decisions with our money. Maybe it's$5 million or$10 million. Regardless, it's an important question, one that's also highly personal. The personal nature of this question is a big reason there aren't many resources online to help you answer in a way that feels tailored to your circumstances. And while there's no shortage of articles and podcasts explaining how to save regularly and where to put those savings for growth, The specifics of knowing if you're on track for retirement often feels elusive. Even if you're a high earner, maxing out retirement accounts and contributing to taxable accounts, you may wonder still if you're doing enough to replace your income in retirement.

1:13In this episode, I'll walk you through two different retirement savings benchmarks you can measure your progress against and explain how to apply them to your situation, and then I'll share how we answer this question for clients at PlanCorp. If you're interested in learning more about becoming a client at PlanCorp, head on over to callwithpeter.com where you can book a call directly with me and we can figure out if it's a good fit for you. Now, one of the simplest benchmarks on retirement savings comes from Fidelity, which suggests you should aim to have at least one times your salary by age 30, three times your salary by age 40, six times by age 50, eight times by age 60, and 10 times by age 67.

1:56Some of the key assumptions Fidelity uses to arrive at these benchmarks include an age-based asset allocation very similar to Fidelity's target date funds, a 15 % savings rate, a 1.5 % annual real wage growth, so that's wage growth after inflation, and then a retirement lasting from age 67 through age 93. However, Fidelity also assumes you'll only need to replace 45 % of your pre-retirement income thanks to factors like social security benefits. Now, there's another table that I'm going to put in the show notes at the long-term investor.com from JP Morgan, who offers an alternative set of income multiples that they list in their guide to retirement.

2:40Now, these checkpoints, they span a range of ages and income levels. So I think this table makes the benchmark a little more applicable to a wider range of people. Now, the assumptions here is that there is a 60-40 portfolio pre-retirement and a 40-60 portfolio post-retirement. The JP Morgan benchmarks assume a 10 % savings rate, 2.5 % inflation, and a 35-year retirement. Now, while these age-based benchmarks are a decent starting point, I think the next step would be taking a closer look at your planned retirement spending. The most common concept in retirement planning is the income replacement rate, which is simply how much of your working income will you need to replace in retirement.

3:26The rule of thumb that you'll see from a lot of retirement experts is using 75 to 80 % of your current income, which is primarily derived by reducing gross income by taxes and savings. But in reality, there is a huge degree of variability in this number. In fact, there's a paper from David Blanchett, who is Morningstar's head of retirement research, and I will be sure to link to that in the show notes at thelongterminvestor.com. And his research suggests that higher income, higher savings households may just need 60 % or less of their pre-retirement income during retirement, while lower earning, lower saving households may need closer to 90%.

4:08Now, some factors that he brings up in the paper include non-portfolio income sources, such as a pension or social security. But for our purposes of determining how much money you should have in your portfolio to retire, you can calculate a modified replacement rate that your portfolio will need to cover. To do this, you simply start with your gross annual salary and subtract out the amount you annually save for retirement. Next, you're going to subtract out the difference in taxes you'd expect from having a lower income in retirement. And then finally, you're going to subtract out any non-portfolio income you'd expect from things like a pension or social security.

4:46And what you're left with is a very rough estimate of how much income your portfolio will need to replace in retirement. And now you can apply a withdrawal rate to come up with a number for how much you need to have saved to comfortably retire. Now, the longstanding commonly used withdrawal rate is 4%, but I think there's some underlying assumptions made in that 4 % withdrawal rate research that are worth calling out. And the first is that the 4 % spending guideline assumes no variability in lifestyle, which is probably the most unrealistic assumption as retirees spend more in some years and less than others.

5:23In fact, most research indicates that retirees tend to spend more early in retirement and less later on before spending tends to pick up again towards the end of life as escalating health care costs come into play. Now, this doesn't mean we have to completely throw out the analysis supporting the 4 % rule, but I think it's worth highlighting the gaps for any of these quick retirement benchmarks. Now, the other big assumptions to know is that the spending rate rises to keep up with inflation. So if the asset allocation is 60-40 stocks to bonds and a retirement spans a 30-year time horizon, it's not just going to be 4 % a year.

6:02It is a real 4 % a year. So it's adjusted for inflation. So all that aside, let's get back to our exercise. Start by multiplying your gross income today by the income replacement rate you calculated earlier for your portfolio. Then divide that number by the 4 % withdrawal rate, which then gives you an estimate for your necessary savings required to retire. For example, if you have a$250 ,000 income and assume an 80 % income replacement rate for your portfolio, then you'll need to withdraw$200 ,000 a year from your portfolio. Dividing that$200 ,000 by 4 % gives you the estimate of the$5 million necessary to retire.

6:45Now, let's say you opted to use a 3 % withdrawal rate, which honestly is a little closer to what research is suggesting these days. The necessary portfolio to support 30 years of your spending then jumps to$6.67 million. For reference, and you can really see how your personal situation is important here, when we were looking at the multiple of earnings from Fidelity, it assumed that you needed$2.5 million today at age 67 for a 30-year retirement, whereas JP Morgan's analysis said that the need was$3.25 million for a 65-year-old earning the same amount and funding a slightly longer 35-year retirement.

7:22So as you might expect, retirement benchmarks and rules of thumb result in a wide range of estimates. And that is perhaps why I'm not super comfortable using them in the first place. Which brings me to the final item I promised at the start of the episode, and that is describing the process we use at PlanCorp to determine retirement readiness. At PlanCorp, our process for answering this question relies on Monte Carlo simulations, which run thousands of scenarios to generate a probability that your plan will be successful. Generally speaking, we'll consider a plan to be on track when it is 85 % successful, meaning that 85 % of the scenarios provide or exceed the value required to meet all of your life goals.

8:07Now, the information that fuels these simulations is gathered through a discovery process where we gather all sorts of personal information on your family makeup, your values, your fears, your interests, your hobbies, your personal and professional goals, etc. Now, gathering this information allows us to make suggestions as we go through the objective inputs of your plan, which will include your income, your cash savings, investments, real estate, any business ownership, your debts, insurance coverage, estate plan, and all sorts of other details. And then from there, we begin to hone in on the timing, the prioritization of your goals.

8:43And so while retirement is the focal point here, it's rare that people don't have other objectives for their life beyond their retirement date. And those goals are really important too. So we want to focus on those as well as with the timeline for meeting them. Then we put all those inputs into the Monte Carlo simulation, along with our estimates on the potential returns and volatility of your investments, rebalancing parameter, taxes, inflation, etc. And then we see what is the probability of successfully meeting all your goals in that base scenario. Then once we have that base case scenario in place, we can start changing the inputs to the plan so you can see how they affect your likelihood of success.

9:22This process, it translates chances into choices. And by helping clients see how different variables like savings rate, retirement age, or spending patterns affect their financial success, we can really empower you to live life that you want to live. People are living longer. Healthcare costs are rising. We have no idea what social security will look like in the future. So it's no surprise that even the best savers have uncertainty around whether they're doing enough. And as you can tell from a few popular retirement benchmarks, answering this question truly depends on your personal situation.

9:59If you're ready to create a retirement plan tailored to your goals. Again, you can schedule a call with me at callwithpeter.com. I would love to be there to help you build a roadmap that gives you confidence and peace of mind as you approach retirement. Thanks for listening to the Long-Term Investor Podcast. To access free financial resources and submit questions to be answered on the show, visit thelongterminvestor.com. Peter Lazaroff is an employee of PlanCorp and BrightPlan. All opinions expressed by Peter and any podcast guests are solely their own opinions and do not reflect the opinions of PlanCorp or BrightPlan.

10:40This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.