How much do you need for retirement? It's complicated

How much money do you need to save for retirement? While it's a very simple question, the response is complicated, because there are so many variables that can shape the answer—sometimes dramatically. Additionally, there is specific retirement planning for all ages.

When you are in your 20s, 30s and 40s, you need to build your retirement savings. Meanwhile, those in their 50s and 60s must find the resources to continue to build savings and accumulate wealth as they prepare for retirement. These folks are also strategically thinking about things like Social Security and long-term care planning.

retirement baby boomer worries
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If you're planning to retire soon, a good back-of-the-napkin estimate is to have a retirement portfolio that's roughly 25 times the value of your annual retirement income. It goes like this: Consider how much money you want in annual income. Then subtract Social Security benefits and any other guaranteed income, such as a pension, and then multiply by 25.

For example, if you need $150,000 per year in retirement income and you'll receive $30,000 from Social Security, you'll need roughly $3 million ($120,000 x 25) in savings.

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There are a lot of common questions when it comes to retirement, but the most common question of all is: "How much can I safely take from my investment portfolio each year?" The answer is: "It depends."

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Here are a few strategies to assess retirement income:

The 4 percent rule: The 4 percent rule is likely the most common cookie-cutter technique in retirement-income projections. This approach applies a 4 percent withdrawal rate to your total retirement portfolio in year one and then increases that amount by the rate of inflation each year thereafter.

So if you have a $2,000,000 portfolio and retired today, you would withdraw $80,000 in income for your first year of retirement. Moving forward, regardless of what happens in the markets, you'd withdraw your base amount plus the corresponding rate of inflation.

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For ease of illustration, if we assume a fixed 3 percent inflation rate, you'd withdraw $82,400 in year two, then $84,870 in year three, etc.

The research behind the 4 percent rule suggests that during the past century, investors would not have exhausted their assets during any 30-year period. The criticism of the 4 percent rule is that the withdrawal rate isn't flexible, and it may create a large end-of-life surplus.

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The market-based approach: Another popular approach used by some financial advisors is to base the retirement withdrawal rate on both the level of stock market risk in the total portfolio and the overall valuation of the markets.

This one is a bit more complicated, but in practice it dictates a higher withdrawal rate—typically, the rate for moderate-risk retirees starts at around 4.4 percent and can go as high as 5.7 percent. For a more conservative investor, the rate starts at about 3.9 percent and goes as high as 5 percent.

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The custom approach: The custom approach places significant emphasis on your personal objectives and goals. It should also take into consideration your investment risk tolerance, current market valuations and the timing of your income and expenses.

In practice, retirement planning is different for everyone. For that reason, the custom approach can be far better than the alternatives. For retirees in need of flexibility, the above methods could pose problems.

"Retirement-income calculations and planning are likely best addressed by looking beyond a cookie-cutter formula, or what is considered the rule of thumb."

For example, if your dream was to live abroad and travel extensively in the early years of retirement and then simplify your life when in your 80s, the above methods would likely lead to a surplus of funds late in life that should have been applied more effectively to living your retirement dream to its fullest potential.

Flexibility is the most important aspect of many soon-to-be and current retirees' plans.

For experienced retirement-planning advisors, some flexibility is usually built into their clients' plans. For example, you can often anticipate the sale of a property or a transition from one residence to another. You might also be able to conservatively factor in an expected inheritance. And it's common to expect retirees to spend less money on lifestyle in their later years.

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The custom approach involves conversation and counsel. It also includes experimenting with "what if" scenarios designed to test the limits of a plan and provide the pre-retiree or retiree with a much clearer perspective of what's possible.

In the end, retirement-income calculations and planning are likely best addressed by looking beyond a cookie-cutter formula, or what is considered the rule of thumb.

Optimal retirement planning is ultimately about defining where you are today, envisioning what your tomorrow could look like and then implementing a well-thought-out customized plan to turn that vision into a reality.

—By Robert Leahy, CEO of Leahy Wealth Management Group