How Much Money Do You Really Need to Retire? Don't miss the Magic Number!

Do you ever wonder how much money you'll need to retire? I imagine you do, since that is one of the most common questions among all adult age groups, and rightfully so. It can be overwhelming to think about, but it's one of the most important questions that everyone should answer. In today's show, we're going to crunch the numbers and uncover the real cost of retirement and how to better prepare. Stay tuned.

Thank you. Welcome to another edition of We're Talking Money. I'm Phil Clark, wealth advisor and founder of OmniStar Financial Group, and today I'm going to focus on how much you will need for retirement. Even if you're already retired, stick around.

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There's a lot of variables that go into calculating the cost of retirement, but after more than 30 years in wealth management, I am never surprised when it comes to figuring out retirement. Let me share my top six mistakes, or things that are forgotten when someone tries to decide what their retirement will look like and how much they will need.

I'll begin with the misconception of lifestyle cost. For some reason, people think they will require less after retirement. However, without work to keep you busy, opportunities abound, and very few of those opportunities come without a cost. For example, will your retirement be modest or luxurious? Will you be a traveler of the world, or will you stay close to home? Your lifestyle choices will heavily influence your financial needs. Of our 10 Elements of wealth management, lifestyle is absolutely one of the most important. In other words, do you expect your expenses to go down when you retire, or do you expect them to go up?

Next is health care cost. As we age, and this happens to all of us, medical expenses tend to rise. Consider insurance premiums, medication, potential long-term care needs. It's critical to plan for these expenses to avoid any unpleasant surprises. Experts say that the cost of health care during your retirement years will exceed three hundred thousand dollars. Are you planning for that? People are living longer, and that requires better planning and more resources.

Inflation is another underestimated cost. Even low inflation can damage purchasing power. That means you're going to need more money, or you must be willing to spend fewer dollars in retirement. In fact, in the last year, many of you saw how exorbitant inflation can be, especially if you're used to living on a fixed income.

Next, it's being too conservative. Now, retirees often will get very conservative post their working years, and they do this because they feel like stocks might be too aggressive, maybe too risky. But retirees need the power of growth and income, yet it's not uncommon for us to see asset allocations that are far too conservative.

Now, the fifth overlooked item is excess withdrawals. For decades, experts have opined about the appropriate withdrawal amount, and depending on other factors, it seems that most experts agree the sweet spot is around four percent, meaning a four percent withdrawal rate. Any more than that and you are at risk of running out of money.

Now, rounding out our top six is everyone's favorite topic, that is taxes. Your retirement income, it may still be subject to taxes depending on your sources of income. Please take into account all types of tax when you're calculating your retirement budget. In other words, know of your income what part of it will be taxed, and will your Social Security be taxed. All of those things take away from spendable income.

Now, when it comes to retirement planning, you can see after just a few minutes of the show, there is a lot to consider. Fortunately, it doesn't have to be overwhelming, but it does require action. In other words, you cannot get anything done, especially as it relates to retirement, until you take action. There is no time for procrastination when it comes to retirement.

Now, if you don't work with a wealth management firm like OmniStar, for example, I have some good news. Lots of companies have done analysis that can help you better understand where you need to be and how to better gauge if you're on track. Fidelity Investments, for example, did extensive analysis, and they came up with what they call age-based retirement savings factors. And these can be very useful as you answer some very important questions: How much will you need to save for retirement? And then, to achieve that first question, how much should you save each year towards your retirement goal? How long will your retirement savings last? And what will your savings cover in retirement?

Now, keep in mind, Fidelity savings factors assume a few things. First, a person saves 15 percent of their annual income beginning at age 25, and that includes an employer match. They invest more than 50 percent on average of their savings in stocks over their lifetime, and they retire at age 67, and they have plans to maintain their pre-retirement lifestyle throughout their retirement.

Fidelity also says that saving 10 times your pre-retirement income by age 67 should help to ensure that you will have enough income to maintain your current lifestyle throughout retirement. Other experts suggest an even higher multiple, and that ranges from 15 to 16 times pre-retirement income. Having that saved by age 67 can seem daunting. In our professional opinion, these numbers are a great place to start, whether you use Fidelity's 10 times pre-retirement earnings or other experts who suggest 15 or even 16 times pre-retirement earnings.

Now, you might be saying, how in the heck am I going to save 10, let alone 15 or 16 times my income by age 67? That is aggressive, without question, but yes, it is doable, and you can get this done. And to help you stay on track, keep in mind these age-based milestones will give you some idea if you're on track. So you want to aim to save at least one times your income by age 30, three times by age 40, six times by age 50, and 8 times by sixty. And depending on your budget, and depending on what you want in retirement, you may adjust these numbers a little bit, so that by the time you're 67, maybe 10 times is enough for you, but maybe you fall into that group of 15 to 16 times.

I would love to know what everyone thinks about retirement planning and what gives you confidence that you are on track. Please share your comments below. We'd love to see it, love to understand what you're thinking, and again, we'll use that content to help us deliver more shows.

Now, determining your number will depend on several variables. I just covered six of those variables, but the most important, it is when do you plan to retire. So what age will you retire? Maybe it's not 67, maybe it's earlier, maybe it's later. The age you plan to retire affects everything: the amount you need to save and your milestones along the way. The longer, by the way, that you can postpone retirement, the lower your savings factor can be, and that's because delaying gives your savings a lot more time to grow. You'll have fewer years in retirement, and most likely your Social Security benefit could be higher.

I want to throw a caveat here. I'm assuming that you will have Social Security. Now, that's for another show, but the reality is Social Security, it will most likely change in the not too distant future.

If you don't like dealing with all these factors and variables, there's another way that you can consider thinking about what you might need for retirement: aim to replace 70 to 80 percent of your pre-retirement income. That is 70 to 80 percent of your pre-retirement income. This means if you earn a hundred thousand dollars a year before retirement, you'll need about 70 to 80 000 annually during retirement. From here, you simply need to determine how much must be saved to meet the annual need.

Keep in mind, this number is just a starting point. Your circumstances are different from your neighbor or colleague or family member, and that means that some adjustments for you will be likely. Things like your bucket list, things like college planning for kids or grandchildren, any number of things could change what your trajectory in retirement might look like. So please don't make the mistake of assuming that because your friend is on track and you're doing what they're doing, don't assume that that means you are on track.

And finally, what rate of return must your investments earn to reach your goal is the last item that I want to cover. Our team refers to this as your index number, or your family index number. While you're working and saving, the accumulation phase as we would call it, investment performance will affect the amount you need to save. The greater your investment performance, the less you need to save. During retirement, on the other hand, we're talking distribution phase. Now, investment performance is more about income and stability. Both are important, but they are rarely the same, and they're certainly not interchangeable for most people.

Not knowing your required performance, I'm sorry to say, it can lead to retirement planning failure. In other words, not taking enough risk, or perhaps taking too much. It's also important to regularly review and reassess your retirement plan to ensure that you're staying on track. If you don't work with a financial or wealth advisor, consider hiring a fee-based planner or money manager. They can be worth their weight.

I will close with a word about staying on track. Regular reviews with a professional pays huge dividends. If you don't work with a financial or wealth advisor, consider hiring one. Having someone in your corner to help you stay on course, it's invaluable. No matter what your age, focus on your goals. Be sure you set goals. Know where you're headed. Know what you're trying to accomplish. Don't be discouraged if you aren't at your nearest milestone. There are ways to catch up to the future milestones through planning and saving. The key is to act, and the earlier you take action, the better.

Now, I hope this video has inspired you to start planning today. Don't reach retirement and realize that you failed to act. Thanks for watching, and don't forget to subscribe to our channel for more financial tips and advice that will be coming every week. I'll see you next time on We're Talking Money.

Thanks for joining us on We're Talking Money. Be sure to visit us at omnistarfinancial.com, where you can learn more about how we provide value to our clients. So subscribe to the show and our newsletters, and drop us a line with topic suggestions for upcoming shows. If you enjoyed the show, we would appreciate you passing it on to a friend and providing a rating on iTunes.

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