Your Retirement Magic Number: Guide to Retirement Planning
How much money do you need to retire? And are you there yet? This is the “magic number” that many prospective retirees will discuss when planning for their financial future.
Many Americans don’t know the answers to those questions, though. That’s what we’re here to help with.
There’s a lot of conflicting advice about retirement amounts, how much you need, how you should withdraw from retirement investments, and more.
The reason for this confusion is that the magic number for retirement, and related financial advice, can’t always be applied to each individual. So we’re going to provide a lot of commonly accepted wisdom, but then also talk about when you’ll want to ignore it due to your specific circumstances. As a result, you’ll be able to better plan for your financial future, well into retirement.
What is a “Magic Number” for Retirement?
The “Magic Number” for retirement is an amount of money that you can expect to live on for the remaining years of your life. As of the current year, most magic numbers for Americans are well over one million dollars!
I say “most” because there isn’t a single number that will be applicable to all people. However, that doesn’t mean you can’t find your own, personal Magic Number.
How to Determine Your Magic Number?
Budget forecasters commonly estimate needing around 80% of your current living expenses per year in retirement. So if you know your planned retirement age and approximate yearly expenses, you can estimate your needs over the course of 10, 20, 30 or more years of retirement.
The fact that we can’t know for sure how many years it will be is the first sign, though, that this isn’t an exact calculation. Other considerations will be detailed below.
Some Americans believe they will need as much as $1.5 million to retire comfortably. This may seem like a lot, but we’ll put that number into context below.
As a result of this high number, though, as many as half of Baby Boomers don’t believe they’ll have enough to retire comfortably, according to that same source. While concrete estimates for younger generations are harder to come by, it’s unlikely that their confidence is any higher.
The number also matters because it relates to your savings, current investments, investing schedule, and retirement plans.
Below we talk a little bit about common wisdom for determining a Magic Number, as well as how that number might change for you.
The 4% Rule
The 4% Rule for retirement spending states that you should anticipate taking out about 4% of your total retirement savings per year. This gives you 25 years of retirement spending.
If that calculation seems overly simple, it’s because it is. However, the rule gives lots of Americans a rough general calculation to see if they’ve saved enough. If 4% of your retirement savings is at or above that 80% living expenses threshold mentioned above, you’re in the right neighborhood in terms of savings.
Limitations of the 4% Rule
The 4% Rule isn’t enough. There are several reasons why:
- Cost of living can increase as you age.
- The money you have saved may go up or down in value due to market forces, giving you more or less flexibility in spending.
- Your expected spend is likely to decrease as you age. That 80% estimate is an average, but someone who is 55 and retired is likely to have higher living expenses than one who is 90.
- You may wish to leave money to your heirs, meaning that you’ll want extra money left over in addition to providing for your retirement.
- Healthcare costs are often forgotten in this equation, and can double, triple, or quadruple (or more!) your living expenses if you aren’t properly prepared.
These can be planned for, but it does mean that the 4% estimate isn’t the only number you should think about.
Cost of Healthcare and Long-Term Care
Depending on the state you live in and type of long-term care you need, median cost of care can range from as low as about $1,500 per month to $10,000 or more per month.
RELATED: Cost of Care Calculator: See Care Costs Near You
Is this part of your retirement plan?
For many, it’s not. The issue is that if you end up having to receive long-term care and don’t have other financial means of covering it, your retirement funds may go into these healthcare costs.
Additionally, institutions like Medicaid often require you to be below certain wealth thresholds to qualify for aid, so it will be your own money paying for care until many of those funds are drained.
This can be financially devastating, even if the care (in-home or in a facility) is only for 1-3 years.
RELATED: What Are the Consequences of Not Planning for Long-Term Care?
Long-Term Care Insurance
Long-Term Care Insurance is one such hedge against the risks outlined above, of retirement plans that don’t account for
The cost of Long-Term Care Insurance varies, though it’s always more affordable when you act early (pre-retirement).
Long-Term Care Insurance also allows for predictable costs. A worst-case scenario with the insurance is that you never use it but have a safety net. Best case, though, is hundreds of thousands of dollars saved.
And either way, you’ll know what the cost will be upfront and can better plan for it in your savings and retirement needs.
What If You Haven’t Saved Enough?
There’s good news and bad news here. The good news is that if you’re behind on retirement savings, there may be strategies that can help. The bad news is that waiting too long decreases the power of these strategies.
Many retirement plans such as 401Ks and Roth IRAs have “catchup” contribution limits that allow you to contribute more as you near retirement in order to make more substantial gains on investments.
For those with lower amounts of savings, the fear of losing money to healthcare costs can be lower, since you may already qualify for Medicaid coverage. High-wealth individuals are actually more at risk here in some ways, and may need to set aside additional money for healthcare or consider a Long-Term Care Insurance policy.
Pensions, social security and other sources of institutional income may also supplement your income post-retirement, meaning that you won’t have to provide all of your income in retirement savings alone.
Preparing for Retirement and Hitting Your Magic Number
So how do you take all of this into account and determine your Magic Number? Let’s walk through the basics of a plan, which you can then cater to your specific needs.
- Track Your Wealth. Know how much money you have saved, and what its trajectory is.
- Continue Investing in Your Retirement. Until you’re retired, every bit of planning helps.
- Determine an Estimated Retirement Age. Knowing when you expect to retire can assist in planning.
- Factor in Long-Term Care Costs. Do you have money set aside for this? Or a Long-Term Care Insurance policy?
- Know What You Want to Leave Behind. What, if anything, do you want children or loved ones to inherit?
- Other Unique Factors. Are you putting a child through college in retirement? Do you have other dependents? These and more can factor into retirement plans.
- Speak With a Professional. Financial planners can look at all of these factors and more to determine the best plan of action for you. And Long-Term Care Insurance specialists can get you free quotes on policies to consider.
RELATED: IRS Raises Pension and Retirement Plan Contribution Limits for 2025
The exact Magic Number you get may not map exactly to 80% of your living expenses per year or 4% takeout per year, but it will be personalized to you and your situation.
Retirement Planning is More Than a Number
The idea that there’s a specific Magic Number is a bit of a myth, as I hope is clear from this article and others like it. Anyone selling you on a specific amount of money for retirement is probably selling something, because they don’t have your situation in mind.
There is a Magic Number…for you, that is. And it will be different for each individual. The Magic Number is also just the start of the planning you should be doing.
Retirement planning is more than a number. It’s a full, considered plan that takes into account everything you hope to do in retirement, and any challenges you face in achieving those goals.
This can be intimidating for some, but it’s also hopeful. It means there are resources and information to help you plan in a way that will give you confidence and security in retirement.