How much money do you need to retire? It’s a popular and hotly debated personal finance topic. Before the pandemic started and inflation ballooned the cost of housing, gas, groceries, and other necessities, a million dollar portfolio was seen as enough. But now some experts are saying millennials may need $3 million worth of assets to have a comfortable retirement in the future. I don’t know about you, but that number gave me sticker shock!
This week I’ve been working on reevaluating the numbers I used in my retirement planning to see if I need to adjust my contributions. I’ve been so focused on paying off my house early for the past few years that I’ve sort of neglected my retirement planning. Although I’ve been saving for retirement this whole time, I’ve let the process go on autopilot without tracking my progress. Going forward, I’m definitely going to pay more attention to how my retirement accounts are performing so I can adjust as needed!
After reconsidering how much money I need to retire, I’ve come up with a number that should cover all my expenses and is achievable based on my current savings rate. If you’re curious about how I did it, here’s a more detailed breakdown of my calculations. However, keep in mind that I’m not a financial planner and am just doing my best to self-manage my investments and finances responsibly!
Estimate Your Expenses
Before you can arrive at your estimated retirement number, you have to figure out what you think you’ll spend in the future when you’re retired. This can be a pretty daunting task because none of us have crystal balls or psychic abilities. Life can change so much in 5 years, let alone 40, so how do you determine what “future you” will want to do, see, and spend?
To try to determine what I’ll spend in retirement, I evaluated my current costs. Right now my spouse and I spend about $3,000 per month on everything, from gas to groceries to home maintenance. However, once we pay off our house, our expenses will decrease by about $1,000 per month. So just to have the basics in retirement, we’ll need $24,000 per year.
Account For Taxes, Fun, and Emergencies
But who wants Netflix to be their sole source of entertainment in retirement? Not me! So in my retirement number, I made sure to account for the taxes that will come out of my 401k withdrawals and include some extra buffer for fun and emergencies. That way I’m not SOL if the stock market underperforms my expectations or I get hit with unexpected expenses.
Estimate Potential Healthcare Costs
I also estimated what I believe healthcare may cost in retirement. Recent reports have shown that a couple leaving the workforce in 2022 may need $315,000 to cover their healthcare costs throughout their retirement. Healthcare costs tend to inflate at a rate of about 4% per year, which is about a percentage point higher than the regular inflation rate, so I made sure to account for that in my math.
My Retirement Number
All in all, I decided my spouse and I will likely need $1.45 million in today’s dollars to retire comfortably. That’s about $5 million when adjusted for inflation since we hope to fully retire in 2065. However, with our current savings rate, we should reach CoastFIRE at age 43, assuming a real investment return of 6%. Once our house is paid off (which will hopefully happen in the next 5-7 years), we plan to invest in rental properties and increase our retirement contributions, so it’s possible that we may be able to start coasting to retirement earlier.
CoastFIRE is basically the point at which you’ve invested enough money to reach your retirement number even if you never make another contribution. This frees you up to get a lower stress job that covers your living expenses until the age of 65 or 67 when you plan to fully exit the workforce and live off investments. It’s basically a modified version of early retirement that’s easier to achieve.
Share Your Thoughts!
What do you think of my retirement number and the calculations I did to get there? Does my math look right, or do you think my estimate is too high or too low? How much do you think you’ll spend in retirement and what’s your retirement number? Share your thoughts in the comments below!
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Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.