How Much $ To Retire?

What does your dream retirement look like? Does it involve beaches? Mountains? Surfing daily? Spending time with grandkids? Volunteering?

When we meet with new clients, one of the first exercises we go through together is running long-term retirement projections in our financial planning software. We input assets, a rate of investment return, annual savings/investing, and outflows for expenses. Based on these factors, the projections show a success rate, which is the probability of achieving all your personal-financial goals in average market conditions as well as poor market conditions.  

Since investments are one of the big factors in determining whether you reach your goals, the question arises, how much do you need to retire? The answer: it depends. Below are some components that can affect this number.

Lifestyle 

Do you go out to dinner every night? Prefer the five-star Michelin restaurant or the hawker center? When on vacation do you stay at the Ritz Carlton or Holiday Inn? Expenses are one of the major factors that influence how much money you need to achieve your goals. If spending is more frugal, you might not need as much of a nest egg. However, if spending is more luxurious, then you might have to work a few extra years or save additional funds to make the funds last and support the lifestyle you want during retirement. 

Risk Tolerance

Can you deal with market swings? How much of a market drop can you tolerate before you start to feel nervous and consider selling? Will this risk tolerance change when you are no longer working and are relying on your portfolio to meet expenses? A 30% downturn might feel different when you are in your 40s and have a steady pay check vs. 70s and drawing from your investments every month.

For those with a higher risk tolerance, you might have a more aggressive portfolio, which provides the potential for higher long-term returns. If you have a higher potential for long-term returns, then you might not need as big of a nest egg upon retiring because those funds could grow more over the next 20+ years. 

However, for those with a lower risk tolerance and more conservative investment portfolio, then you might have to work longer or spend less to meet retirement spending needs given less potential for growth. At Avrio, we diversify our clients’ portfolios between ETFs, Single Stocks, Single Bonds, Rental Real Estate, Private Equity, and Venture Capital to have various buckets to pull money from during different market conditions and smoothen volatility. This helps our clients stay invested and confident in their financial future, even during market volatility.

Time Horizon

When creating a financial plan, we choose an end date when clients pass away and no longer need assets to support their lifestyle. This is generally age 92 for men and age 94 for women, which is based on statistical averages. If there is longevity in the family, we can increase the mortality age but generally don’t decrease it in case they live longer than expected, needing more funds to sustain additional years of living expenses.

We occasionally say that a successful plan is one where you fund all expenses throughout your life, but your last check bounces. This is an objective for some people. Others might want to leave assets to their children or grandchildren to support their lifestyles and goals. Everyone differs on their perspective with this, but taking this into account is vital.

Additionally, it is important to consider the short-term time horizon, as funds needed in the next few years would be more conservatively allocated to avoid volatility right before an expense. The rest of the portfolio would likely be more aggressively invested to drive growth and make it last over 20+ years—money for today vs. money for tomorrow. Even a difference of .50% per yr annualized investment returns has a significant impact over the long-term given compounding.

These are some of the factors to consider when determining how much money you need to retire. There isn’t one correct number that applies to everyone; it is personalized and should encompass all the financial decisions you need to make for yourself and your family.

For more information on your own retirement planning and how much of a nest egg you need, please reach out to one of our wealth planners.

This material is intended for educational and informational purposes only. It is not intended to provide specific advice or recommendations for any individual. Additionally, you should consult with your Financial Advisor, Tax Advisor, or Attorney on your specific situation. The views expressed in the material are that of the author and do not necessarily reflect those of any market, regulatory body, State or Federal Agency, or Association. All efforts have been made to report or share true and accurate information. However, the information may become materially outdated or otherwise rendered incorrect due to subsequent new research or other changes, without notice. The author nor the firm are able to always verify the content from third-party sources. For additional information about the firm, please visit the MAS Website at https://www.mas.gov.sg/  and the SEC Website at www.adviserinfo.sec.gov. For a copy of the firm's ADV Part 2 Brochure, please contact us at info@avriowealth.com.