Headlines like this mean very little. Some people say you need a million dollars. Others simply go for income replacement percentages starting at 70% and up. Still others say you need 25x your working income.
You actually need an amount that will allow you to maintain your planned standard of living less Social Security. During retirement how you use that amount in terms of earnings versus principal makes a big differences well. Build a sufficient income stream from interest and dividends and you are less likely to deplete the principal and you may sleep better as well.
Of course what matters most in determining your need for assets in retirement is your income at the time you retire which is the basis for the amount you will need to replace.
I’m conservative so I think you should begin retirement replacing 100% of pre-retirement income. And, for flexibility you should have savings both in and out of qualified retirement plans, taxable, tax deferred and tax-free investments.
Let’s assume you are retiring February 2019 and you now earn $55,000 a year. Your Social Security benefit will be about $18,780 per year leaving you to generate an additional $36,220 for full income replacement. If you are married your SS family benefit will typically be 50% higher.
If you had $1,000,000 invested, you would need to withdraw less than four percent each year for 100% income replacement. However, the required minimum distribution (RMD) would generate a larger withdrawal and will increase each year after age 70-1/2. After paying taxes you can reinvest any excess withdrawal you don’t need. I would (and do) put that money in a tax- free municipal bond fund where interest is reinvested until needed.
You may be in even better shape if your qualified plan investments were in tax-free vehicles such as a Roth IRA or Roth 401k. The Roth IRA is not subject to minimum distribution rules, the 401k Roth is, but you can roll your Roth 401k account into a Roth IRA while you are alive.
If you want to go the more conventional route and think you can live as you like on 70% income replacement, you need to save less. You only need to generate $19,720 above your SS benefit in our example and you could do that with assets of about $493,000.
So, here’s the point. You need a saving and investing and spending plan that you tailor to your needs. If, because of paying off a mortgage, moving to a lower cost area and/or changing your lifestyle, you need only 70% income replacement, go for it . . . but if you are years away from retirement, don’t count on it just yet . . . plan for more.
Whatever you decide, don’t forget about two things in your planning; inflation and survivor income needs if applicable.