Planning for retirement: How much is enough?

Q: I’m just a couple of years away from retirement. How do I know if I’ve saved enough?

A: This is probably the number one question among physicians approaching retirement, and depending on whom you ask, you could get 10 different answers. Unfortunately, there is no one-size-fits-all formula, and too many online tools use generalizations that fail to take into account your unique situation.

There is not a textbook definition of sufficient retirement income, so it’s important to ensure you have enough money saved to enjoy retirement in the manner you choose. A variety of factors to consider include the following:

Retirement income needs. You can find various “rules of thumb” indicating you need anywhere from 60% to more than 100% of your pre-retirement income. Look carefully at your current expenses and how you plan to spend your retirement before deciding how much you'll need. If you pay off your mortgage, stay in good health, live in a city with a low cost of living, and engage in inexpensive hobbies, then you might get by with less than 100% of your working income.

However, if you plan to travel extensively, need to pay for health insurance, and still maintain significant debt levels, even 100% of your income may not be enough. Additionally, make sure to factor in any additional major purchases you plan to make in retirement. Examining your current and anticipated expenses will help you hone in on a figure.

Retirement age. Many physicians would like to retire before age 65, but that typically requires significant personal savings. You want to be sure your retirement savings and other income sources, such as Social Security, will support you for what could be a very lengthy retirement. Reducing or extending your retirement age by a couple of years can significantly affect the ultimate amount you need.

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Life expectancy. Most people take into account the average life expectancy when estimating the length of their retirement. However, an average life expectancy means you have a 50% chance of living beyond that age. To ensure you don’t run out of retirement income, it's typically better to be conservative and assume you'll live at least a few years past the average. When deciding how many years to add, consider your own health as well as how long other family members have lived.

Rate of return. The rate of return on your investments plays a huge role in determining the amount of savings you will have at retirement. At a minimum, make sure your expectations are based on average returns over a very long period. Again, it’s safer to be more conservative and assume a rate of return lower than long-term averages.

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Inflation. Even modest levels of inflation can significantly impact the purchasing power of your money over long time periods. For instance, after 30 years of just 2% inflation, your portfolio's purchasing power will decline by 45%. When estimating an inflation figure, always consider long-term inflation rates, since your retirement could last for decades.

Retirement tax rate. If you save significant amounts in tax-deferred investments that will be taxable when withdrawn, your tax rate can significantly affect the amount you'll have available for spending. You may find your tax rate is the same or higher after retirement.

As you can see, there is no simple or universal answer to the retirement feasibility question. Many factors need to be taken into account. Your financial adviser should be able to assist you and give you the direction needed to attain the ultimate goal of a successful retirement.

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Q: A friend recently suggested we look into purchasing an immediate annuity. How long do the payments for an immediate annuity last?

A: As a general rule, you can arrange to receive regular payments for a specific number of years, for the rest of your life, or the joint lives of you and a designated beneficiary. All other factors being equal, the longer the amount of time you select to receive payments, the less you will receive with each check. Conversely, you will receive larger monthly payments if you arrange to receive them for just the next 10 years assuming that your current life expectancy is greater than 10 years.

Prior to making the investment, ask the insurance company to provide you with the payout amounts for all time periods available to you. 

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Questions of general interest will be chosen for publication. The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice.

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