How Big Should My Retirement “Nestegg” be?

By Richard Hitchcock CFP®

 OK, so you don’t count your chickens before they hatch… but looking ahead, how much will you need to save for retirement?  

Of all the questions surrounding retirement planning, the question most often asked is “How much will I need to save?”  Let’s talk about several factors that should help answer your question.

1. How much income will you need in retirement?


As you look ahead to retirement, will you need the same income you are making now, less or more?   This depends on what goals you have.  Are there special things that will require additional expenditures?

  • Vacation home?
  • Extra vacations?

It will also depend on the fixed costs that you will have in retirement. For example:

  • Will your house be paid off?
  • Will you have car payments?
  • How about student debt for children?
  • Will you have expenditures for work clothes or transportation to work that you will not do in retirement?

Will some expenditures cease upon retirement?

  • Contributions to retirement accounts?
  • Union dues?
  • Excess car costs?
  • Clothing/uniform costs?

Will some expenditures begin in retirement?

  • Healthcare. Are you receiving healthcare from your current job that you will have to pay for later?   Are you in relatively good health?
  • Relatives. Will you potentially be needing to take care of an aging relative?  Do you have any special needs among your relatives for which you might be responsible?
  • Housing.  Are you living where you will want to live or will you be moving?  (Downsizing sadly doesn’t always mean downsizing cost or payments.)


Your first step in answering “How much do I need to save?” is to determine how much income you will need when you retire.  While the rule of thumb suggests you might need 80% or so of your current income, there is the possibility that, due to rising healthcare costs and other personal circumstances, you will need one hundred percent or more of what you are earning now.


2. Do you want to leave a legacy?  


Most people entering retirement today have two dreams:

  • First, they don’t want to be a bother to friends or family and so they want at least a dollar in the pot when they pass.
  • Second, they want to leave something to their children.


Sadly, most people simply don’t have enough money saved to be able to live comfortably as well as leave anything to their heirs.  The hard truth of whether your money is for you or your heirs is a reality many are facing.  Dr. Moshe Milevsky, Associate Professor in Finance at the Schulich School of Business at York University in Canada, has been championing the idea of investing retirement money in ways that would give retirees more retirement income but would not be available to heirs upon their death.  He says that the old investing trade-off between risk and reward is giving way to the trade-off between us and them.


Simply put, if you wish to leave a legacy, you will need to save more money.  If you leave a legacy, the money you save becomes the principal from which you draw an income during retirement.   Your entire income is only the income earned.  If you don’t want to leave a legacy or have the portion of your retirement money set aside for just you, your retirement income includes earnings and using some of the principal regularly to supplement the earnings.


3.  What other streams of income will you have in retirement? 


Retirement income is usually a river of money that is composed of many small streams:

  • Pensions
  • Social security for both spouses
  • Inheritances
  • Rental income
  • Part-time jobs
  • Distributions from investment assets

All these streams combine to make a retirement income.  Every situation is different.  For example, a minister married to a school teacher (both of whom sadly make much too low a salary) have large pension plans from their denomination and school boards.  To equal the income this couple enjoys, a very large lump sum would need to be saved.


Analyze your various streams of income.  Make sure your social security records are correct.  Know how your pension works and how to best maximize it.  Be creative in what could become sources of retirement income through hobbies, rental income and part-time jobs.  Every penny earned through these other streams allows less demand on your retirement portfolio and, consequently, the less you need to save.


4.  What about changes and emergencies?


Retirement years are ripe for change.  Kids move away, spouses die, old dreams often loom large.  I’m originally from Florida and I can attest to the fact that many retired individuals use changes in their lives as excuses to do interesting things.  Many of these things require money or, at least, uses of money that aren’t most financially sound.  Some of these changes can be anticipated.  Some are unplanned and unavoidable.  Retirement savings over and above that needed for income is very important.   What some people call emergencies are simply events that we all know will happen sooner or later.  Saving towards these events is critical.  You simply can’t raid the income cookie jar to pay for another car when one breaks down.  You have to save enough to have excess capacity in your life for emergencies and for the whims of life that often come in retirement.


So, perhaps now is the time to start counting your chickens!



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