Pete the Planner: A case study: how much you’ll need for retirement

Dear Pete,

What do you think the bare minimum amount of assets a person can have, and successfully retire? I’ve previously heard you need at least $1 million in retirement assets to retire, but somehow that both sounds like not enough and entirely too much. I’m 61, and my wife is also 61. We both make about $60,000 a year. We have four years left on our mortgage, have no other debts, and we live below our means. I don’t feel like we need $1 million. Do you think we do?

—Richard, Indianapolis

These types of questions are my absolute favorite. They remind me of how delighted I was when I was introduced to story problems in math class. It’s also why I love financial planning. A story plus some math equals a plan. I just got the chills. Don’t worry if you didn’t; that’s what we nerds are for.

Like every story problem, we need to pause and figure out exactly what we’re trying to figure out. We want to know how much money you need to transition into retirement, without a significant lifestyle change. No, seriously, that’s the real question you asked. Sure, you dressed it up differently, but as you will see here shortly, your situation is rather simple and has a high chance of a successful outcome.

I math-ed a bit and determined your current household after-tax income is roughly $7,000 a month. The goal is to re-create as much of that $7,000 a month for a comfortable retirement. The fun news is, you’ll need to re-create a lot less than maybe you first thought.

My favorite part of your current financial plan is your mortgage. As long as you don’t decide to move and take on another mortgage, you’ll likely reduce your need for income by about $1,500 a month once your mortgage is paid off. (I estimated your principal and interest payment to be $1,500). This means your $7,000-a-month income replacement need just went to $5,500 a month. And if you have any other debts that will be vanquished, or any other expenses you won’t carry into retirement, your income replacement need just decreased again.

Ready for the big one? Based on my estimates, your combined Social Security retirement income will be roughly $5,200 a month ($2,600 a month each, for you and your wife) at age 67.

In the most dire straits, you could squeak across the retirement finish line with no additional assets. I don’t recommend it, but the math could temporarily work.

However, there are three distinct reasons you specifically should aim for at least a $400,000 nest egg.

I’m guessing you didn’t work for four decades so you could barely enjoy the fruits of your labor. Therefore, I recommend at least a $1,000 a month cushion, if possible. If you had a $400,000 nest egg, and you drew only 3% from it, that would give you an additional $1,000 a month. This withdrawal rate is very conservative, and it would increase your chances of the $400,000 being around as long as you and your wife are.

You’ve likely dealt with various emergencies in your life that have required money to solve. That won’t change in retirement. What will change is your ability to refill your emergency fund with work income, when you tap it to deal with an emergency. That’s why you need a giant emergency fund entering retirement. If you don’t, each emergency weakens your financial life permanently.

My biggest concern for you revolves around creating a sound financial plan that takes into account the loss of either you or your wife later in retirement. The survivor will be allowed to keep only the bigger of the two Social Security retirement benefits. This sudden and shocking change in income will be incredibly problematic if you don’t account for it.

The secret to your retirement success is that you won’t need a lot of money. Your current income, mortgage payoff date and projected Social Security retirement income all work in your favor. You definitely don’t need $1 million, but in a perfect world, I’d love for you to have at least $400,000 when you retire.•

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Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.