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It all boils down to what your ideal retirement looks like.
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For many Americans, there are few things more stressful than thinking about retirement — specifically, worrying whether they will have enough to live comfortably. That’s why a recent Graham Stephan tweet came as such a surprise to his followers. According to Stephan — a real estate agent, investor, and social media guru — most people end up overestimating how much they’ll need to retire comfortably.
Stephan conducted a poll
The 32-year-old Stephan conducted an online poll, measuring responses to the following question: “How much do you think you need to retire right now?”
Here are the results of that poll:
Reaction
The majority of Stephan’s Twitter followers disagreed with his assessment. Many pointed out the role inflation plays in planning for retirement, while others shared their concern that Social Security will not be around by the time they retire.
Other responses mentioned that Stephan’s followers tend to be young and it’s natural that younger followers would believe they need more money to retire. After all, the poll question was worded: How much do you think you need to retire right now? The younger a person is, the more they’ll need to retire.
Finally, a follower pointed out that it was Stephan himself who told those watching one of his YouTube videos that they needed at least $3 million to retire.
Whether Stephan was wrong or right about people overestimating how much they’ll need, for most of us, it’s ultimately going to come down to how much income we’ll need in retirement.
How much will you need to live out your retirement dreams?
When people think about retirement, it’s fair to assume that they don’t share a single vision. For example, not everyone wants to ride camels in Egypt or explore the rainforest. Some folks dream of hanging out with the grandkids more, playing a round of golf with friends once a week, or cultivating a garden in their backyard that would make Martha Stewart jealous.
Different retirement goals require different annual incomes.
What the experts say
Financial advisors have long recommended that we aim for 80% of our pre-retirement income in retirement. For example, someone who earns $100,000 a year would shoot for an annual post-retirement income of $80,000.
The problem is that one size does not fit all. A retiree living in a higher cost-of-living area may need more than 80% to maintain their desired lifestyle, while a person living in a relatively inexpensive area could need less.
One more thing the 80% rule assumes is that working adults spend every last dollar of their current income. Let’s say you currently earn $100,000 per year. You’re married, filing taxes jointly, and contributing 10% of your pre-tax salary to a retirement account. After all deductions, you bring home roughly $2,400 biweekly, or a little over $62,000 per year.
If you spend every cent of that $62,000 each year, it’s likely that you’ll need to invest enough to replace at least 80% of your pre-retirement income. However, imagine that your total monthly expenses hover around $4,000. You plan to pay all outstanding debt off, including your mortgage, before you retire. Your math may show that you don’t need to replace the full 80%.
Note: Don’t forget that the entire 80% does not have to come from investments. You’ll also want to factor in income from Social Security, pension, and annuities.
The unknowable
The primary reason so many of us spend time worrying about retirement is because there are so many unknowns. For example, we don’t know what the rate of inflation will be by the time we retire. We can’t predict how well our investments will do. We don’t know precisely how much our medical expenses will be, although we do expect them to take a chunk out of our income each year. It’s the sheer number of variables that keep us awake at night.
So, is Stephan right? Do most people end up overestimating how much money they’ll need in retirement? For those who live simply, avoid debt, and manage their monthly expenses like a pro, maybe not. But for someone who dreams of living large in retirement, Stephan is definitely wrong. In fact, they may underestimate how much it will cost to retire in style.
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