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How much money do you really need to retire?

Published: Feb 25, 2014 6:02 a.m. ET


Opinion: Focus on paying for retirement liabilities, not carefree lifestyles



Do you become a different person when you retire? Will your values, sense of humor, and pastimes change?

Probably not. So why do many investors focus on amassing as much money as possible for retirement instead of considering what their liabilities will be and planning appropriately?

When investors understand their financial liabilities, they are better-equipped to change their saving strategy and eliminate fears of not having enough money for retirement. A focus on “the number,” in contrast, can make retirement planning extremely stressful. An Allianz study found that 82% of respondents 44-to-49 years old with dependents feared outliving their money more than death.

The best solution is a liability-driven approach that focuses on an investor’s exact needs, and mirrors the strategy pension funds use.

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Most investors have a fundamental misconception about retirement planning: That it’s about maximizing your returns. Instead, investors should focus on risk management: what’s the amount of volatility you’re willing to accept to get the performance on your account and ensure you won’t outlive your money?

Thoughtful retirement planning begins by calculating your true retirement liability, which can prove challenging for many individuals You may think that you have a complete picture, but focusing on your expenses will help you to reframe the retirement question from “How much money do I need to retire?” to “How much money do I need from year to year?”

What are you missing?

Investors and their financial advisers should look at the most recent U.S. consumer expenditure survey issued by the Bureau of Labor Statistics. Some of the results are surprising.  For example, Americans age 65 and older:

Spend 34.2% of their money on housing. A recent survey found that only fourteen percent of financial advisers talk to their clients about their future housing needs. If you’re an empty nester or expect to be, it may make sense to downsize so that you can take advantage of the equity that you’ve built up in your home. In any case, make sure that you have a plan.  

Spend 16% of their money on transportation, and less than 5% of that pays for gasoline. The majority comes from the expense of buying new cars — a temptation that many retirees succumb to. If you’re nervous about making your money last through retirement, be judicious about non-essential purchases. Often, used cars will be just as efficient (and much cheaper).

Spend just 0.5% of their money on education. Retirees could improve their retired lives substantially by going back to school. As technology continues to advance, spending time in a structured learning environment could bring a richer retirement.

Robert Stammers

These are just some of the liabilities that everyone should consider when planning their retirement, but they’re nowhere near the whole picture. Health care, food, and entertainment should be added, plus travel and anything else you plan to spend money on in retirement.

It’s important to figure out what you want to do in retirement and how much will it cost.  Remember, the key is to consider how much income you need each year rather than “How much do you need?”

How to figure it out

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