Many retirees who have mortgages or who live in large cities find they may need $10,000 per month in retirement living expenses. Indeed, $10,000 per month is a good starting point for annual retirement living expenses based upon my experience working with Atlanta professionals. The big city isn’t cheap. With that in mind, how much do you need to save to support those kinds of living expenses in retirement?
Of course, in any hypothetical situation like the ones we’ll discuss, the quality of the results depends upon the inputs. Garbage in, garbage out, right? For today’s example, we’re taking a simple, back-of-the-envelope type approach. The point is to give you an idea of what you may need to save.
Our first assumption is that retirement begins at age 62. This is the earliest age that any of us can apply for Social Security retirement benefits. We’ll also assume that inflation will be 3% and our expected portfolio returns are 7%. Given current market valuations and inflation data, you may or may not agree with those assumptions!
Speaking of Social Security benefits, we’ll need to make some quick assumptions for them as well. Since we’re trying to support $10,000 per month in retirement living expenses, we can reasonably guess both spouses have high incomes in the following examples. Therefore, we’ll assume age 62 retirement benefits of $2,000 per month for each spouse.
Finally, for portfolio income, we’ll use the venerable 4% Rule to determine what we can sustainably withdraw from a retirement portfolio. While the 4% Rule has its critics and limitations, it’s perfect for our back-of-the-envelope calculations.
Retire Today at Age 62
It’s helpful to calculate what you’ll need to support $10,000 per month in living expenses today. There’s no future growth or portfolio additions to factor in here, so it becomes a simpler calculation and a great starting benchmark.
To find out what our hypothetical couple would need to withdraw from their portfolio, we’ll first subtract their Social Security benefits from their total living expenses. Deducting $4,000 per month from the total of $10,000 leaves us with $6,000 per month needed from our retirees’ investments. That’s $72,000 per year.
Using the 4% Rule, we divide $72,000 by 4% to arrive at a total portfolio need of $1.8 million. If our retirees in this case have $1.8 million saved, they’re good to go. If not, then they’ll want to consider either delaying retirement or reducing their living expenses.
Indeed, having done this for clients for many years, somewhere around $2 million is what you’ll need to have in order to support $10,000 per month in expenses.
Retirement in Five Years
Instead of age 62, let’s now assume our soon-to-be retirees are 57. That still gives their investments time to grow as well as time to continue socking away more retirement funds. How much ground can they make up in five years?
We’ll make the exact same calculations as we did in the last example, but we’ll want to factor in growth and savings. Let’s also not forget the effects of inflation. In five years, $10,000 will not buy as nearly as much as it does today.
In five years, the $72,000 we’ll need from the portfolio grows to $83,468. To simplify things, we’ll assume that the Social Security benefits will be the same. Of course, Social Security benefits do increase annually with a Cost-of-Living Adjustment (COLA) to help with inflation. We’ll keep things simple for this example, however.
Using the 4% Rule, we find that our couple will now need $2,087,000 in five years. Again, we find ourselves around that $2 million number.
Let’s now assume that our couple has $1 million already saved for retirement. They’ve done a great job so far to get to that point. Assuming they see 7% annual growth on their investments, they can expect their retirement portfolio will grow to $1,403,000 in five years.
However, that still leaves a difference of $684,000 that our couple will need to accumulate over the next five years to support $10,000 per month in retirement expenses.
Again, assuming 7% annual returns, they’ll have to save $9,600 per month in order to hit their goal. That’s over $115,000 per year in savings! Obviously, this level of savings isn’t possible for most people. If that’s the case, it’s a better idea to start thinking about delaying retirement or cutting back on the expenses.
Retirement in Ten Years
Now, let’s assume that our couple is 52 instead of 57. If all else is equal, how would that affect the result?
Inflation pushes the annual portfolio withdrawals from $72,000 today to $96,762 in ten years. That 3% compounds quickly, doesn’t it?
Using the 4% Rule, our couple will now need a portfolio of $2,419,000 at retirement in ten years.
Assuming again that they have $1 million saved that will grow at 7%, their investments will grow to $1,967,000 between now and retirement. However, we still have a difference of $452,000 between what they’ll have and what they’ll need.
To make up for the shortfall, our couple will now have to put away approximately $2,600 per month in retirement savings. That’s $31,200 per year – a large amount by any means, but not completely out of the question for a two-income household.
Do You Need $10,000 Per Month in Retirement?
Of course, every case is unique. There’s also much more nuance we could add to our assumptions for investment returns, inflation, and a sustainable withdrawal rate. However, these numbers give us a good idea of what is required to support $10,000 per month in retirement living expenses.
Because of inflation, the amount needed for retirement is greater than most people initially expect. This is the nefarious aspect of inflation – it demands that, over the years, our investments will need to work hard on our behalf to fund a successful retirement. Determining exactly how much you need to save can be a difficult calculation.
If you’d like help building a retirement savings plan, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.
As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.