What Is Your Retirement Number?

Once you retire, you start relying on Social Security and your savings to cover your costs of living. While it’s true that your expenses may drop a bit in retirement, you still need some source of cash to cover the costs that remain.

Although Social Security should help cover some of those costs, it was never meant to be your only source of retirement cash. Your retirement number -- the amount you have saved for your retirement by the time you reach it -- makes a huge difference when it comes to determining the lifestyle you’ll have once you stop working. With that in mind, these 10 different scenarios may represent what you face, depending on what your retirement number ends up being.

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If you have nothing saved for your retirement and you rent your home, then unless you’re one of the few remaining with a pension, you’ll be entirely relying on Social Security to cover your costs. The average monthly Social Security retiree benefit for December 2020 was $1,544.15. That’s enough to keep you just above the poverty level in most parts of the country, but doesn’t offer much of a life above that.

Chances are that instead of completely retired, you’ll end up working, even if it’s a lower-paying job. You might also end up living in subsidized senior housing or with your children as a way to stretch your Social Security dollars a bit further. No matter how you slice it, though, retiring with nothing saved and no home equity to tap is a recipe for tight budgets and compromises in your retirement.

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Even if you haven’t saved anything for your retirement, having a paid off house can help you a great deal when it comes to funding it. If you live in a low cost of living location and have low property taxes (or can get a senior-focused exemption), you might be tempted to try to stay put in your home. Your Social Security might be enough to cover your ordinary expenses, but that’s still a very dangerous plan to follow. After all, when things go wrong, houses can need expensive repairs.

Instead, your best path to a reasonable retirement likely involves downsizing to a lower-cost home, or even to an inexpensive rental, and using the money you free up to help support a modest lifestyle. Even then, unless you’re shifting from a very high cost of living area to a very low cost of living one, you’re likely looking at a situation where you need to watch every dime in order to stay independent.

There’s a straightforward guideline in retirement planning known as the 4% rule. Based on that rule, if you keep a diversified portfolio, you can spend 4% of your savings in the first year of your retirement and adjust your withdrawals for inflation every year after that.

The good news is that by following that guideline, you have a very good likelihood of having your money last as long as your retirement does. The bad news is that with just $50,000 saved, it adds only around $2,000 per year ($166 per month) to the amount of money you’re able to spend above your Social Security benefit.

As a result, that $50,000 is probably not a life-changing amount of money versus having nothing saved at all, and your retirement future will likely look a lot like the ones outlined in that first scenario. What it can help with, though, is that it serves as a decent emergency fund for when you face unexpected expenses in your retirement. In addition, if you’re moving in with family, some of that money can potentially help with setting up the facilities in that home to help you age gracefully in place.

With a $50,000 nest egg on top of a paid-off house, you buy yourself some time when it comes to figuring out your retirement plans. If you have both a senior-focused property tax exemption and ongoing lifestyle costs that you can cover from your Social Security check alone, that $50,000 can give you a reasonable emergency buffer. That can allow you to survive, if not necessarily thrive, until a major emergency disrupts your lifestyle or you reach the point where you need help with your daily living.

If that doesn’t sound like the retirement you dreamed of, you still have the option to downsize, lower your costs even further, and free up more cash to better cover your everyday costs. That $50,000 isn’t much of a life-changing amount on its own, but when added to the other financial benefits from downsizing, it can be a difference maker in what your golden years look like.

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That same 4% rule indicates that a $100,000 nest egg can generate $333.33 in monthly cash flow in retirement. When added to the typical Social Security benefit of $1,544.15, the combination provides monthly retirement cash flows of nearly $1,900. In a low-cost part of the country, that can be enough to cover a modest lifestyle, at least as long as your health holds out.

You may still want to look into a retirement job of some sort, especially if you’re still early in your retirement years. That can both add structure to your day and add additional spending cash to your pocket, while putting less pressure on your nest egg.

Do be aware, though, that a $100,000 nest egg can drain away quickly in the event your health starts to deteriorate. As a result, you’ll probably want to make plans for that eventuality while you’re still healthy. That way, if you do find yourself burning through that nest egg, you will have a better idea of what comes next, instead of scrambling and adding even more stress to an already tough time.

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Having $100,000 on top of a paid-off home starts to get you to the point where you can potentially consider strategies that let you age in place. With a few enhancements like stair lifts, grab handles, walk-in tubs, and wider doorways, you can potentially get yourself far deeper into retirement without having to move. You’re still looking at a lifestyle largely dependent on your Social Security income with few of the frills you may have hoped for, but you do have a shot of at least keeping your family home longer.

If you start early in your retirement and make the changes over time, you might even be able to make your home more friendly to aging in place without completely burning through your nest egg. Do note that if your health reaches the point where, even with those enhancements, you are unable to live independently, you may still find yourself quickly burning through that nest egg. Still, you’ll find yourself in a much better spot with that $100,000 than you would be without it.

A net worth around a cool quarter-million dollars gets you somewhere in the neighborhood of what the typical American has when approaching retirement. Based on the 4% rule, it’s enough to add $10,000 of annual spending to your Social Security benefit. The combination of your savings plus the typical Social Security benefit brings the amount you can spend sustainably to around $29,000 per year. That doesn’t support a lavish lifestyle, but it is more than twice the national poverty level for an individual.

If you recognize that aside from healthcare costs, most people’s spending tends to decline as they age, you might spend a little bit more early in your retirement, accepting the trade-off of having less later. Either way, with a cool quarter million to your name, you’ve reached the point where you can look toward a more active retirement in those early, more independent years.

Still, note that $250,000 probably won’t pay for more than a couple years’ worth of nursing home costs. As a result, while you do have flexibility in your retirement during your active years, you’re not at the point where you can count on leaving a financial legacy to your children and grandchildren.

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Unless you’re in a high cost of living part of the country or inflation spirals substantially higher by the time you retire, $500,000 should be enough to where you can really start enjoying your retirement. Above and beyond an active senior lifestyle, you may be able to travel, spoil your grandkids, and build the memories that should carry you through the later part of your golden years.

The thing you still need to watch out for, though, is nursing home costs. An extended stay in a nursing home can still be enough to knock out your nest egg. The Medicaid asset drawdown rules mean the remaining spouse can still live a reasonable lifestyle if only one of you needs nursing home care. Still, while those rules protect your spouse from impoverishment, they don’t necessarily protect your assets when it comes to passing them on to the next generation.

You might be able to leave an inheritance to the next generation, but it all depends on how costly those last few years of your retirement wind up being.

If you’re a millionaire, you’re at the point where long-term care insurance might actually make sense when it comes to balancing the costs with the potential to protect your assets for the next generation. If you go that route, just be sure to buy it while you’re young enough so that it’s still reasonably affordable and while you're healthy enough so that you actually qualify for the insurance.

The thing to note is that a $1,000,000 nest egg still only offers you around $40,000 of annual sustainable retirement spending, according to the 4% rule. That, plus Social Security, will get you to the point where you can likely live comfortably throughout your retirement, but you’re still not talking Lifestyles of the Rich and Famous-type living.

Once you reach multimillionaire status, you’re likely to be at the point where your money can truly help you live more cheaply than those who have less can afford to live. Around that point, you can make a reasonable choice to self-insure for long-term care while still having enough to protect your spouse and have a great chance of leaving an inheritance to your children.

In addition, the $80,000 a year that the 4% rule indicates that your nest egg can sustainably throw off puts you ahead of the American median household income, even before you consider Social Security. When you recognize that it also comes without the costs and taxes associated with working, you can start to see how much further the money you have available to you can go once you’re retired. That gives you a chance to even look for ways to splurge a bit during your retirement years.

Still, while a $2 million (or larger) nest egg can give you the opportunity for a comfortable retirement that you can enjoy, it’s not an unlimited amount of money. Even bigger nest eggs can -- and have -- been lost by those who spend as though their money will last forever. With one eye toward enjoying your golden years and another toward the kind of financial stewardship that let you build that nest egg, you are at the point where you can reasonably assure your money will outlast you.

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While you’re likely to be able to subsist during your retirement even without much socked away for it, having a retirement plan that builds you a bigger nest egg can help you support a much nicer lifestyle. The sooner you get started designing and running that plan, the better your chances are of getting it accomplished by the time you reach retirement.

You’ll never again have more time before you retire than you do right now, so get started now and put yourself closer to the path to the retirement number you’re hoping to reach.

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