‘How Much Should I Save For Retirement?’ is the Wrong Question

Ask yourself these important questions to make sure you’re getting the most out of your future lifestyle plans.

Retirement on the brain? It is certainly a hot topic of conversation in my house — and my partner and I are in our mid-thirties. It seems we’re FAR away from retirement, especially with 3 young children. But the question is still there. Does retirement need to be 30 years away? That’s A LOT of “doing what we’re doing”. So, what if? What if we could retire earlier? What if we could start a second “passion” career sooner? What would we need to believe and more importantly DO to make that happen?

Whether you’re thinking about a second career, traditional retirement, a second home, or a lifestyle change, you need to make sure you’re thinking about it the right way. In this article, I’m going to generically call this stage ‘retirement’ for ease — but the method can apply to looking at all new phases of life or lifestyle change.

What Do You Want? Really?

Instead, ask yourself — what do you want? REALLY. NOT, what does your financial adviser tell you? NOT, what does Google tell you? What do you really want? What type of home, where, travel, food, lifestyle, gift-giving, etc. What do you want the next phase of your life to be? You have to answer these questions for yourself before you can begin to understand if you’re saving enough. Bottom line: You have to know what you want.

How Much?

Now that you’ve answered the most important question, you can monetize it.

Start with the expenses.

How much will that future cost you each year?

If you expect your home to be paid off, and kids to NOT live with you, then the cost of retirement might be A LOT less than your expenses today.

Or if you plan on traveling a lot more than your annual expenses may be higher than today.

While the number of scenarios is countless, think through yours.

Understand that your vision may change over time, so focus on what you WANT right now.

Take yourself through the exercise of what does a typical day look like in your future and how will that influence your expenses.

This exercise will give you a much clearer picture of your future than the typical blanket “70% of today’s expenses” that you will see in a free retirement calculator.

Consideration:

Even if you plan to have your home paid off, ongoing home-related expenses still exist, including property taxes, homeowner’s insurance, maintenance, and utilities.

When?

Once you understand the expected annual expenses in retirement, and a life expectancy estimate, you can figure your total savings (or nest egg) in any given year. For example, if you want to retire at 55, you may need to have $3 million saved by the time you are 55, but if you’re willing to work until 65, you may need $1 million to be saved by the time you are 65 years old. This way of looking at your savings goal may help you determine when you want to retire.

How?

Now that you’ve determined your number, you can think about how to get there — which will require at least one more article to get into. So I’ll simply list some possible income streams to consider:

• Salary or other Active Income
• Retirement Savings Accounts
• Other Invested Asset Interest & Dividends
• Fixed Income
• Other Passive Income streams (such as property rental, royalties)
• Social Security

Considerations for income streams and the timing of retirement:

1. The date at which you’re able to begin withdrawing 401(k) or IRA without penalty — if you retire before this date, then you will need to live off of non-retirement savings or other investments or income. In my own personal modeling, I’ve separated what I call ‘liquid’ assets and ‘illiquid’ assets. Liquid assets are those that I can turn to cash quickly and without material penalty (for example cash, non-retirement vehicle stock market investments). Illiquid assets are property, real estate, and 401(k) or IRA savings before the penalty-free date. 401(k) and IRA become liquid once you reach distribution age.
2. Similarly, you are able to begin taking Social Security benefits at a range of ages, but the amounts change based on the age you begin to take them out. Also, here I’ve included Social Security at the bottom of the list because potential future regulation changes may change the Social Security benefit landscape — in other words, you may not want to count on Social Security benefits to fund TOO MUCH of your retirement.

How much to save for retirement will look different for everyone, but if you’re authentic about what you want in retirement, you can calculate a number. A number you and your family can anchor on to make financial decisions for years to come. To make this work, you need to make sure:

1. You are honest about you want retirement to look like
2. Try not to depend on Social Security benefits (depending on your age) — perhaps let Social Security be the cherry on top of your great financial plan — an extra vacation or spruced up landscaping budget
3. If early retirement or a second career is a priority for you, then avoid the pitfall of creeping expenses. Often when our income increases; we increase expenses commensurately — we buy a larger home, a more expensive car (or a second or third vehicle), or travel more lavishly. Expenses increase instead of income-producing assets or other savings vehicles.

There lies the beauty of this exercise. By starting with WHAT DO YOU WANT? REALLY? You give yourself an anchor to come back to time and again. You’ll stay true to yourself and your long-term goals. And you’ll build the life you want!

This article is for informational purposes only, it should not be considered financial, tax or legal advice. Consult a financial professional before making any major financial decisions.

Like what you read? Want to hear more from me? Subscribe to my email list here!

If you’d like to read from all medium writers, click here to join! Your membership supports me and all of the writers you read! You’ll also get full access to every story on Medium.com.