How Much Retirement Savings Do You Really Need?

How much money do you need in order to retire?

Superstar financial advisor Suze Orman last year sparked an internet firestorm when she pegged it at $5 million - albeit for those who want to retire early.

It's not hard to find financial experts in the media spouting out sums ranging from $1 million in assets to as much as $10 million.

However, such numbers can be discouraging to many people while not being particularly relevant or useful when it comes to hammering out retirement plans.

How much you will need depends on a myriad of financial and personal factors that sweeping estimates, seven-figure estimates thrown out on TV in the media rarely dig into or account for.

"There are many ways to work on projections -- the flat 'I need $2M' or 'Suzy says "$5M!' is too generic and self-defeating for the majority of Americans," said Dennis Nolte, vice president and financial advisor at Seacoast National Bank in Florida and a certified financial planner.

Faulty accounting

Those multimillion-dollar estimates certainly sound frightening, but they are hardly all they are cracked up to be.

Just take the $10 million number that is occasionally thrown out.

That number is based on retirement scenarios that guarantee "100% success probability," or in layman's English, ensures that you will never outlive your private savings, Nolte said.

That means you would need enough in the bank and investment accounts to live off the interest and gains generated and never draw down the principal. That, in turn, is how you get to retirement sticker shock, Nolte said.

Such projections also typically don't take into account the home equity you may have built up over the decades -- and the ability to tap into it with a reverse mortgage, or for that matter, potential rental income, Nolte said.

And more than one client has blithely dismissed the one guaranteed source of retirement income most Americans who have worked outside of the home can expect -- Social Security.

There are certainly intense policy debates on the need to shore up Social Security as the huge Baby Boom generation continues cashing in on its retirement benefits.

But the fixes, while not necessarily popular, are far from cataclysmic, with proposals that include raising the retirement age a couple years and applying Social Security taxes to income above the current $127,200 cap.

"People throw away their Social Security benefit as 'it'll never be around.' Of course it will!" Nolte said.

Avoiding sticker shock

Financial planners say more helpful than setting lofty retirement savings targets is embarking on an individualized planning process that takes into account retirement wants, dreams and expectations.

Chris Schiffer, executive vice president and chief operating officer of AEPG Wealth Strategies and a CFP, said his firm runs retirement cash flow projections at each client check-in meeting.

But planners at AEPG also discuss different "scenarios on what retirement looks like for them," Schiffer said. That involves plugging in different possibilities into the plan - such as downsizing and moving to a warmer state, vacation plans, and visits with grandchildren - and seeing how it holds up.

Planners at the firm also look at possible things that can go awry in retirement and stress test the plan based on some of these potential issues. They will also try to "break" the plan with the "worst scenario they can think of," Schiffer said.

"Having open discussions with clients usually results in a great deal of relief and peace of mind for clients" Schiffer said.

Financial planners at other firms also eschew focusing on a big end number, concentrating instead on what percentage of income clients need to save each year in order to have enough to live on in retirement.

There is no one size fits all answer to this question, noted Dana Anspach, author of "Control Your Retirement Destiny," and founder and CEO of Sensible Money, LLC, a fee-only registered investment advisory firm in Scottsdale, Ariz.

A 30-year-old making $40,000 who wants to retire at 66 and maintain a $40,000 a year income would need to save 10% a year. But a 45-year-old making $200,000 would have to sock away 30% each year to maintain the same lifestyle in retirement, she noted.

"We try to remind people, you are saving for the future you," Anspach said. "There aren't many negative consequences to saving too much, but the consequences of saving too little can cause decades of struggles."

And you can hit a big savings numbers and still not have enough if it doesn't align with your expenses and spending in retirement, said Serina Shyu, a certified financial planner at Jon Baker Financial Group in Atlanta.

For example, if you save $1 million but spend $100,000 a year, your savings won't last that long. It's important to look at a number of potential variables - such as what happens if you retire early or are forced to retire early, or you wind up living longer than you expect.

"There's rarely a target number that people focus on when it comes to savings," Shyu said. "It's more akin to how comfortable do you want to be while you're retired and how much money will it take to provide that comfort."

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