Wealth Management

The answer to the question “How much money do you need to retire?” depends on several different factors, making it difficult to pin down an exact number. However, there are a number of questions that can be answered to give a more accurate projection of the sum of money an individual needs to retire.

How Much Money do You Need to Retire: 5 Factors to Consider

1. Quality of Life

Some people plan on living quietly in retirement, possibly downsizing their home to save money and simply enjoying some peace and quiet. However, others intend to travel around the world, eat fancy dinners or buy an expensive new car.

It is helpful to map out what a typical year in retirement may look like in order to understand whether or not it’s necessary to save additional money to cover leisurely expenses.

2. Cost of Care

Retirees may also have spouses, children or other family members that are still dependent on their money. This is another huge factor to consider.

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3. Anticipated Retirement Date

An individual’s expected retirement date and life expectancy will affect the amount of money necessary to retire. Naturally, the longer an individual can anticipate being retired, the more money they will need to save.

4. Taxation on Retirement Funds

Based on the types of retirement funds an individual has, they can expect different degrees of taxation.

For example, withdrawals from Traditional IRAs and 401(k)s are taxed at ordinary income tax rates, while Roth IRAs and 401(k)s are not, since the initial contributions to the funds have been taxed already.

One must take into consideration the money available in each retirement plan, how much they plan on withdrawing monthly and the rate at which those withdrawals will be taxed. This way, the net dollar amount of each withdrawals can be more easily pinpointed.
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5. Investments Outside of Retirement Funds

Other investments may provide helpful passive income while saving for and during retirement, such as:

Asset allocation models and investment portfolios should be updated to reflect financial goals during retirement, which tend to be relatively more conservative.

There is no single answer to the question “How much do you need to save for retirement?” but understanding the above factors can help provide some guidance. See a previous La Ferla Group blog about average retirement savings for some information to benchmark your savings by age.

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