How Much Do I Need to Retire?

The crucial conversation when it comes to retirement is all about how much you need to have saved. The traditional $1 million benchmark doesn’t have as much staying power as it used to. In fact, a recent study found that Americans believe they need at least $1.4 million to retire comfortably.

We’ve found that most people believe they’ll need a lot more saved before they can retire or they feel like they need to work a lot longer than they actually do.

So what’s the true answer? Well, it’s different for every individual but today we’ll look at the data and break down the numbers to help you get an idea of how much you’re going to need to retire.

Here’s what we discuss in this episode:

0:00 – Intro

2:26 – Why people think they need more than they do

3:40 – Results from a study

5:15 – Average annual income

6:35 – Single withdrawal amounts

12:21 – Married withdrawal amounts

16:12 – How much saved for single people

22:15 – How much saved for married people

Full Transcript:

Ben (00:00):

Coming up on this episode of Candid Conversations Retirement Talk with Ryan Cravitz. The question everybody asks is, how much do I need to retire? Well, everybody's always said 1 million. That's the magic number. Well, it all depends obviously on who you are, but a recent study found that that number that people expect that they need for retirement is actually jumped up quite significantly. We'll break it all down. Coming up.

Announcer (00:21):

This is Candid Conversations Retirement Talk with Ryan Cravitz of Cravitz Financial & Insurance Solutions.

Ben (00:29):

Well, hello and welcome in. Glad to have you on the show, the podcast now on video. If you're listening traditionally as always on Apple or Spotify, wherever, come on over to YouTube. We dropped a link in the channel. You can now see us on video. Glad to be here. Ryan. Excited to be with you on camera now. Yeah, I'm

Ryan (00:44):

Excited to do this. Let's do this on video, we said, and what do you know we're doing it. I know we've been doing this, the audio version for some time, but this will be nice. We can also share things and I think it'll be a good experience.

Ben (01:00):

Yeah, I do too. And we're going to have some visuals today. So if you are listening on audio only, come on over to YouTube. You'll see some of the slides and some of the numbers that Ryan's going to share with us today. And while you're on the YouTube channel, check out a lot of the other educational videos that Ryan puts out. He's consistently putting out a lot of content on YouTube, so I think hopefully this will maybe bring a few more people over to discover what you're doing. I know you're doing good work, so hit subscribe while you're here. We'd appreciate that support as well. Again, today we're talking about how much do you need to retire, Ryan, I know this is something you're pretty passionate about, right?

Ryan (01:29):

Yeah, this is a big deal. And the reason I think this is so important is that over the years, what I've found is that most people think they need to have a lot more saved before they can retire, or they think they just have to work a lot longer than they actually do. And so what I want to do here is look at some of the data, kind of break down some of the numbers and perhaps help you get an idea of about how much you might need to retire.

Ben (01:58):

And I think that's important because you want to have a good grasp of that number. You don't want to work longer than you have to, and you also don't want to retire earlier than you probably should. So we're going to talk about some income numbers have lay that out for you, what it looks like if you're single versus married, and how much you need to target potentially in retirement. Again, if you have questions, 714-462-9155 is the number for Cravitz Financial. And of course you can always find this video, all of our videos and podcasts online at CravitzFinancial.com. Alright, Ryan.

Ryan (02:26):

Well, Ben, I was going to say too, one of the things too that's really making this so important to do is again, people do think they need to work a lot longer or they need to have a lot more saved. And the reason I think that is I just think there's a lot of information out there, which unfortunately I think kind of scares people into, again, having to think they have to work longer or whatever the case is. There's all these things like the Tax Cuts and Jobs Act is going to sunset here in a couple years, which it is. We're going to go back to the old higher rates, but that doesn't necessarily mean that if you retire that your taxes in your specific situation are necessarily going to go up a ton or that you wouldn't be able to retire. Everybody's different. But we hear these things about Social Security and the issues there and Medicare and all that. There's all different types of things that are out there, but unfortunately, I think some of the media and some of the just different things that we read and see, just steers people to think that again, that you have to have a lot more or that you have to work a lot longer. So this is important stuff.

Ben (03:39):

And that's a good point too, because it's something that you actually read that kind of sparked this conversation, right? Because of a study that you saw.

Ryan (03:46):

Yeah, I think this came out maybe a couple months ago. I forget when. I've been wanting to put together a video on this and kind of break down some of the numbers here. But the study that I saw was something about Americans would need $1.4 million before they could retire. And if you just type in here today anyways, do Americans need 1.4 million to retire? You'll see this study, it was conducted or it shows up here in a number of different outlets, news outlets, things like that. So you could take a look at it here and see what it's all about. I don't want to go through that. That's not really the point here of what I want to talk about because when I see this study, I wonder to myself, who were the people that were surveyed here? Are they people that were on the verge of retirement or are they people that were planning to work another 20 or 30 years?

(04:44):

Are they high income earners? Are they low income earners? What's kind of the situation? So really what I want to do today is again, break down some numbers and take a look at about how much you might need. And I'm going to use words like about and approximate because a lot of these are just real approximate numbers and everyone's situation's going to be a lot more nuanced than we're going to take a look at here. But let's dive in a little bit. So the first thing that I wanted to take a look at after seeing this study, and it's saying that I think something about the average American thinks they're going to need $1.4 million. And so the first thing I wanted to find out was, well, how much, what is the average annual income of the typical American worker? And so I did a little research, I found this right here on BLS that the median workers income, as you'll see right here, median workers income was $1,145 a week in the fourth quarter of December, 2023.

(05:52):

So you multiply $1,145 a week times 52 weeks in a year, and you get a number just shy of $60,000. So I wanted to start with that. With is the median worker, which by the way, if you're not familiar with the term median, that means that half of the workers make more than that amount and half of the workers make less. So we'll look at this based on somebody making $60,000, and then we'll also look if somebody was making $120,000 or $180,000 and we'll look at it if you're single and if you are married. Okay, so let's dive in here.

(06:34):

So let's look first here, Ben. This is somebody that's single over the age of 65. Okay? And you'll see there on the left, if they're employed right now, they're working right now, I'm going to assume again, they're making $60,000 and there's a lot of assumptions here, but one of the assumptions is this person is in California, so this includes California state tax into the mix. The after tax amount that they would have is $48,515. Again, approximate numbers. Now in reality, that number could very well be even lower than that after tax number. And the reason is, is that what I'm assuming here is that nobody is contributing to a pre-tax retirement account like a 401(k) or some other type of retirement account like that on a pre-tax basis. If that were the case, then of course the after-tax amount that they're actually spending would be even less than this.

(07:37):

Okay? Now the next thing I wanted to take a look at is let's assume that this individual is going to receive Social Security. So they've been paying into Social Security over the years and based upon a worker that makes $60,000, that's 65 years old here today. And as you'll see down there, that second star, I'm assuming that they're retiring at their full retirement age in this example, which is 66 years in 10 months. Now, if that were the case, and I'll show you where I get this number from, get it from right here. This is Social Security's website. This is the quick Calc estimator that you'll see. And so just plugged in a date of birth. Again, we're recording this in 2024, plugged in the earnings here, and what it does is it runs a calculation to see or to assume that they're making $60,000 a year, and they have been making that over the course of the last 35 years, adjusted for inflation.

(08:48):

Remember that Social Security looks at your highest 35 years of earnings. So this is just a quick estimator type of tool. So after going through this, that's where I was able to get this number. Now, of course, this is an annual number, this $22,092, and then what we need, if the goal here is to maintain the same standard of living that you had in your working years, what we need here is $48,515. Okay? That's the after tax amount. So that's the Social Security. Then we need other income coming from somewhere else, and you could have various sources of income. Again, I need to oversimplify this, and the reality is you could have an IRA or 401(k), which is subject to ordinary income tax when you withdraw that money, but you could also have a Roth IRA, which as long as it's a qualified distribution, you don't have to pay any taxes on that.

(09:57):

Or you could have other income where you're paying taxes on capital gains and dividends, and that's taxed differently. So here's the bottom line. What I wanted to do was make this so that you would need to have a higher amount saved. So in other words, I'm going to assume that all of the money that's in their portfolio is in an IRA, which is going to be subject to ordinary income tax. So if they had their money again in a Roth, IRA, they wouldn't need to have as much money saved because they wouldn't have to pay the tax when they withdraw that. Okay? So in this example, our employee that makes $60,000 now retires in order to maintain that same standard of living that after tax amount, which again, I'm assuming he's not contributing or she to a pre-tax retirement account. So in reality, they may be living on even less money than this. They would need to withdraw about $29,000 from an IRA. Does that make sense, Ben? Yeah.

Ben (11:07):

So just assuming that these are your only two sources of income, obviously everybody's situation would be different. You might have more than this, but just to keep it as simple as possible, these are your two sources of income. This is how much you're going to need.

Ryan (11:18):

100 percent. And so the other thing that I went ahead and put on here was what if you're making $120,000, or what if you're making $180,000 and you'll see how much you would need to withdraw from an IRA to replace or to have that same standard of living there. What you'll notice is that when you look at the Social Security, if you're making $60,000, now you're getting, let's say $22,000 from Social Security. If you're now making $120,000, you're not going to get double that. You're not going to get like $44,000. It's less than that. So the more money you make the less Social Security is going to replace of your income in retirement, you'll need to have more money that you'll need to withdraw from other sources, IRAs, for instance, in this case. Okay. So you'll see those numbers right there. Alright, next thing, let's take a look at this based upon a married couple.

(12:22):

Now with a married couple, again, we're going to assume the same income numbers, and I'm going to assume that only one spouse works and the other spouse is not working. And I'm going to assume here that again, that primary worker is going to take their Social Security at 66 and 10 months, the full retirement age, and then the spouse I'm going to assume is the same age, and that they will take a spousal benefit off of the primary workers' Social Security benefit, full retirement age benefit. So they would get half of what their benefit is. So what you'll notice here with a married couple filing jointly over 65 compared to a single person over 65, is that they don't need to withdraw nearly as much from the IRAs. And the reason is, number one, the Social Security benefits are higher. And number two, of course, because they're filing as a married couple.

(13:28):

So you have two standard deductions, which I'm assuming they're taking the standard deduction in this case, and I'm assuming, and also the tax brackets are more favorable for married couples. So you could see for a worker making $60,000, they only need to withdraw $18,700 approximately. Again, every number on here is an approximate number, and you'll see the other numbers. They're associated with somebody that is a higher income earner making $120,000 or $180,000. Okay? So Ben, any questions on this? I'm going to go to the next section here because that's really the key that we want to dive into is, okay, this is how much we need to withdraw from the IRA, but now the question is, okay, how much do we actually need to have saved in that IRA, that pre-tax retirement account to make this work?

Ben (14:28):

Yeah, it's interesting just looking at the numbers because of your point about Social Security, it eats up a bigger portion if you don't have as much to worry about in terms of lifestyle and expenses, if you're trying to live on a smaller amount versus when you go up, it's great if you want to be able to spend more and live that lifestyle the same way as you were working, but also means you got to do more on your end to save more. So proportionally it's a little bit easier if you're trying to live on a smaller budget or smaller lifestyle versus that. But I'm curious how that looks if you actually start looking at how much you're going to need, which is what we're trying to figure out here.

Ryan (15:01):

And that's critical too because everything that we're looking at here assumes that you want to maintain the same standard of living all throughout retirement. Now, the reality is that I find, and actually working with clients is most people want to scale back the amount that they spend over the years still adjusted for inflation. But typically the amount, let's say you retire at 65 or 67 or whatever it is, the amount that you will want to spend in your first five or 10 years of retirement with most retirees is going to be higher. And then over time, most people just tend to want to spend less because you get older and you're just not doing as much stuff. And so that's just normal. But again, I want to error more on the side of being more conservative here. Again, assuming you're not investing in a pre-tax retirement account, otherwise you would have to replace even less income, and again, all the other assumptions.

(16:07):

So let's dive in right here and let's look at about how much you might need to have saved. Now let's look first for a single person. Okay, so the left part of the screen where the employed and the retired, that's in the yellow and the green, we've already looked at that, but now we're looking at, okay, so for that worker that's making $60,000, that now needs to withdraw $29,300. Now the question is, okay, how much do they actually need to have saved? Now, beyond the scope of what we're going to get into here today, there's various types of withdrawal strategies in retirement. One of the more popular ones that's out there is called the 4% rule. Now, I'm not a fan of the 4% rule because I believe it leads most retirees to underspend in retirement. I think it's just too conservative for most retirees, and I'll explain a little bit why.

(17:19):

But first, the idea of what the 4% withdrawal rule is. The idea is simply that when you retire, you can withdraw 4% of your portfolio on an annual basis and then increase that each year to account for inflation. And if you have a balanced portfolio stocks to bonds that over a 30 year period, you would have a very, very high likelihood of not running out of money. So again, I don't want to get into this a lot other than really just to say that I do believe it leads to underspending. Again, a lot of people, as I mentioned earlier, don't continue to spend in a linear fashion all throughout retirement. Most people want to scale back. They want to scale back their living expenses over time anyways. And so again, there's different types of strategies here, but I want to keep this relatively simple. So the one other thing that I want to look at is the 5% withdrawal rate.

(18:27):

Not really a strategy or rule, neither one really is, it's 4% rule has just been called that, but it's really just an idea or theory that was developed by a guy back in the 1990s. So this can be confusing. So let me explain what these numbers really mean. So if we believe that we're only able to withdraw 4% of our portfolio in order for it to last us for let's say 30 years, let's say we retire at 67 or 65 or whatever, and we need that to last for those 30 years, if we're going to withdraw 4%, let's say we have a million dollar portfolio that's $40,000. So if we assume that 4% rule and we need 40 grand, we need to have a million dollars saved. Now, if we go with a 5% rule, so to speak, where now we feel that we can withdraw 5% of our portfolio and then adjust that for inflation each year, then we don't need to have as much saved, okay? Because let's say that you need that $40,000 in income, well, now maybe you only need to have $800,000 saved, right? Because 800,000 times 5% would be $40,000. Okay? So does that make sense, Ben?

Ben (20:02):

Yeah, and I know you're about to get into this, but yeah, I'm looking at that withdrawal number versus the withdrawal rate. And if you're targeting that withdrawal, if that's how much you know need to withdraw $40,000 for your example or $29,300 like the slide shows if you're watching the video with us to get to 4%, is that number and if represents 5% of your withdrawal rate, you have that second number so you can kind of see exactly how much you're going to need over that course of the 30 years you're talking about.

Ryan (20:29):

That's exactly right. Yeah. So if we're assuming that 4% is all that we're comfortable withdrawing and then adjusting for inflation, then that worker that's making the $60,000, they need to withdraw that $29,300. So that means they would have to have about $732,000 saved because that's $29,300 is 4% of $732,000. Now with the 5% rule, we don't need to have as much money saved, and that's because we're taking a higher withdrawal of that. So 5% of $586,000 is $29,300. So that's how that works. And again, obviously there's higher amounts that you're going to need to replace the higher income if you're a higher income earner, as you'll see there. But there's a lot of things here that we're assuming. Again, I've talked a lot about 30 years because that's what the 4% withdrawal rule is based on. The reality is that retirement planning, planning for income anin d retirement is so much more nuanced because you may not live for 30 years.

(21:51):

You may be retiring at 70 or 75, and your life expectancy may be much shorter than that or any one of a number of different types of situation. And then obviously, as we've talked about, we've really simplified this, assuming that you just have Social Security and just have an IRA or a 401(k). Now the next thing, let's take a look at a married couple. So again, now with the married couple, we don't need to withdraw as much, and so therefore, following 4% withdrawal rate or 5% withdrawal rate, we don't need to have as much saved. So for that worker with the median wages there, about $60,000 under ther 4% rule, which I believe is conservative, they need to have $467,000. With the 5% withdrawal, it's $374,000. So that $1.4 million, I think it was $1.46 million was the number that they came up with in the study.

(23:00):

Just going off of these simple numbers that I put together here today, as you can see, for some people that will likely hold true, but for other people it likely won't. The other thing here too, Ben, I didn't even mention is what happens so often is that when people retire, or sometime soon afterwards, where they might be paying on a mortgage, but now they have the mortgage paid, and so that's another reason why a lot of people just don't spend as much in retirement. The crazy thing that I have found over the years actually is that it's the people that have been the best savers, that have the hardest time then becoming a spender in retirement, spending as much as they actually could afford to spend. So hopefully at a high level, this helps to give a good idea of just some approximate numbers. Again, each person's situation's going to be much more nuanced than this.

(24:08):

One of the things I don't even think I mentioned is I'm assuming for this married couple that he's taken or she's taken their Social Security at full retirement age, but it might make more sense for maybe him or her to take it at 70 and maybe the spouse at a different age. And in this case, they're both the same age. But again, everyone's going to be a different type of situation here. So this is really meant to be an overview to kind of help you get an idea of approximately how much you might need. Now, one comment that sometimes comes up is we're looking at 4% and 5%. That's only 1% difference, but remember, the difference between a 4% withdrawal and a 5% is that's 25% in an increase in income if it's based upon the same portfolio value. Now, there's other withdrawal strategies that we're not going to get into here today or really get into the specifics on how they might be utilized, but again, this is just meant as an overview here today.

Ben (25:20):

Yeah, I encourage you to get in touch with Ryan if you actually want to sit down and figure out how much you're going to need to answer that question specifically for you, but it is a little bit eye opening to kind of see, well, maybe I don't have to do as much as I thought I could, or maybe I could retire a little bit earlier that I anticipated. If I manage my lifestyle and budget a little bit better, or, hey, I want to be able to spend more on retirement, maybe I need more than that 1.4. So again, so many questions to answer, so many nuances, and I'm sure, Ryan, even though AI is great, technology is great, and you can search for about anything online that you want, you probably can't find a true answer that fits you by just popping this into a Google search, because there's so many factors that go into truly finding that number for a person.

Ryan (26:01):

Yeah, it's tough. Oftentimes, one of the things that comes up is like with Social Security, there's a lot of great information there, and a lot of times you can get your answers there, but then sometimes it spawns additional questions, so it can make it challenging, for sure.

Ben (26:18):

Yeah. Well, I'll encourage you again to get in touch with Ryan. If you want to learn more, CravitzFinancial.com, you'll find this show, all the other educational videos online. Plus you can get in touch with Ryan, schedule a meeting wherever you're watching from. Ryan's happy to work and sit down and meet with you and figure out your financial picture and where you're trying to go and how best to get there. You can also call 714-462-9155. We appreciate you watching the show on YouTube. Again, plenty other content to check out. Please hit subscribe wherever you're watching. We'll have another video coming soon, Ryan, looking forward to it. Appreciate your time today. Absolutely. Good to see you.

Announcer (26:52):

Thanks for checking out today's episode. Please remember to like the video on YouTube and subscribe so you never miss an episode. If you're within five years of your desired retirement date, let's make sure you're on the right track with a free 20 minute consultation. Ryan can help answer your pressing questions such as, when can I retire? What are my options for healthcare in retirement? Should I adjust my investment strategy as I get older? And when should I collect Social Security? This consultation is the perfect starting point to craft a sound retirement plan. Schedule your call now by clicking the link in the description or visiting CravitzFinancial.com.