March 6, 2023
A recent Bloomberg article, “How Much Do Investors Say They Need to Retire? At Least $3 Million”, noted that roughly two-thirds of investors they polled wanted between $3 million and $5 million as a nest egg before they retire.
$3 million to $5 million is a significant amount, but is it too much or not enough for retirement?
What Does Retirement Mean to You?
Everyone’s vision of retirement is different. It may be sitting on a beach, playing golf every day, or helping in the community. My vision for retirement is to move north to New England and travel in an RV. As different as everyone’s idea of retirement is, so are the costs associated with those visions.
As an example, traveling in an RV can be less expensive than flying somewhere when traveling. Or living in a beachfront home will have different costs than staying in the family house and not moving. Some ideas about retirement may be more expensive than others.
How much is enough?
Many Americans retire in their 60’s and will live into their 80’s and 90’s. This means the nest egg will need to last for at least 20 to 30 years and sometimes more than 40 years.
Many factors will determine if a nest egg can last through retirement, and these differ for everyone. Some of the variables that will determine how long a nest egg will last are listed below:
- Withdrawals – how much will be taken out for living expenses and other items like travel.
- Inflation – As prices rise, the amount needed for living expenses will rise also.
- Taxes – Withdrawals from tax-deferred accounts like 401ks and IRAs are taxed as income. The impact of state income taxes and real estate taxes should also be considered.
- Social Security – When is the most beneficial time to start receiving Social Security payments? Are there other options available like survivor or disability?
- Pension – Some Americans still have a traditional pension plan. Does the plan have cost-of-living adjustments?
- Investment returns and dividend income – How a portfolio is invested will have a significant impact, especially over the 20+ years of retirement. Maintaining the correct balance of risk and returns during retirement is critical to making a nest egg last.
- Supplemental Income – Some retirees will work after retiring to provide some additional income or to just do something they always wanted to do but couldn’t do before.
Since these factors are different for everyone, a generic formula or any of the online guides will not answer the question of “how much is enough”. Only a detailed and comprehensive financial plan that is updated and reviewed consistently can answer that question.
Benefits of a Plan
For some individuals, $5 million may not be enough for their retirement dreams. But for many others, a more modest nest egg can provide the lifestyle they may have envisioned in their retirement. The beauty of having that comprehensive financial plan is knowing what may be realistic and possible in the future.
At Prato Capital, we feel financial planning is the key to a better financial life and we help our clients through the process every step of the way. They may not need a $5 million nest egg to live the life they envisioned in their retirement, but they will not be guessing if they will have enough, they will know.
“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So, throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”
– H. Jackson Brown, Jr., Author.
Gregory, Gabriella, Brian, Samer, and Chris
Prato Capital Management Where Integrity Meets Discipline