How Much Do You Need for Retirement?
Author Laura Dogu believes that one of the biggest retirement mistakes is not carefully calculating how much money you'll need.
Author Laura Dogu believes that one of the biggest retirement mistakes is not carefully calculating how much money you'll need.
Christine Benz: Hi. I'm Christine Benz from Morningstar.com. I'm here at the Bogleheads' Conference, just outside of Philadelphia, and happy to be joined today by Laura Dogu; she is one of the co-authors of the Bogleheads' Guide to Retirement Planning.
Laura, thanks so much for being here.
Laura Dogu: My pleasure. Thank you.
Benz: Well, it's a great event, but I would like to focus a little bit on your book, Laura, there's lots of great information in the book. I'm wondering if you can share with our users some of the key tips that you have and that you impart in the book for people entering retirement or people already in retirement.
Dogu: Well, I think, the key to retirement planning is really to understand how much money you're going to need in retirement. And most people don't really take the time to calculate that number to the best of their ability. Because once you understand how much you are going to need it's easy to plan to figure out, if you've gotten there already and you can retire or whether you have more time and more money that you need to be able to save in order to afford to retire.
With the market the way it's been in the last couple of years, I know a lot of people have been scared about retiring or have been deciding to hold off for a couple of years because the value of their retirement assets has gone down.
Benz: Right. So I know that you coach people on how to work on those calculations. You also talk about withdrawal rates and calculating a livable withdrawal rate, because that's a key part of the process, too.
<TRANSCRIPT>
Dogu: Exactly, those are very key parts. For example, if you determine that you need approximately $100,000 a year when you retire, and you have a pension that's worth $50,000, then your portfolio really only needs to generate $50,000 rather than the full $100,000.
On top of that if you have Social Security that can be applied, perhaps $20,000 a year, that's $20,000 less a year that your portfolio needs to generate. So that's going to leave you with approximately a $30,000 gap that you are going to need to be able to withdraw from your portfolio. And as many studies have shown that approximately a safe withdrawal rate is not more than 4% of your portfolio per year, which is a very small amount. So for $1 million portfolio that's $40,000 a year. So, in the example that I just gave you for the person needing $30,000 a year, they're going to need to have something pretty close to $1 million, but not quite, in their own assets and their own retirement account in order to be able to afford to retire. And that's a big number for a lot of people and that's sort of scary, and people haven't taken the time to think through this process.
But of course, their expenses in retirement aren't going to be comparable to their expenses when they're working, and so sometimes it's a little bit complicated to get there. If people have been paying off their home mortgage, for example, for many years, their fixed expenses will drop. They won't have the mortgage expense in retirement anymore. If they have purchased a new car recently before retirement, they may not have to buy another car for many years, and that will keep their costs down.
If they live in an area of the country that has a lower cost of living rather than a higher cost of living, again their expenses will stay down. And of course, you don't have all those expenses that come with work, the lunches out with your colleagues, the commuting back and forth, the business attire, that sort of thing. But that doesn't mean all of your expenses go down. People hope to enjoy life in retirement.
Benz: Right, and certainly a lot of folks who will be continuing to work or working part time at least…
Dogu: Or working part time, exactly, then they can go off and sort of enjoy part of the time and work part of the time or travel part of the time, whatever it is that is of interest to them.
Benz: So, Laura, one topic I want to touch on with you. Your book has a lot of great advice on sequencing withdrawals from your various retirement accounts and also on asset location, so what to hold where. And with tax rates poised to change in 2011, there's been a lot of buzz. I've written articles about how to think about it, strategies to employ. What's your take on whether people should make any changes in advance of these impending tax changes, what do you think?
Dogu: Well, personally, I would recommend that everybody just hold fast. You're just guessing one way or the other, you're placing a bet, and I don't know about most people, but I am not very good at doing that. I really have no idea, no way to predict what Congress is going to do or even when they are going to do it. They may not do it this year, if they make a change, it may be sometime early next year retroactive to this year.
So, there's really no way to actually know what's going to happen. You might guess right or you might guess wrong, and it could cost you quite a bit of money. For example, I've read articles, encouraging people, perhaps, to sell some of their assets and have a gain, so that they can go ahead and receive the lower tax rates on some of those gains. And that's a good strategy, if in fact tax rates do go up, but if they don't go up, you've now incurred a taxable event in your life, and that's going to cost you money that was really unnecessary.
So, I really would recommend that people just hold fast and wait. It may cost them money in the end. They might have been able to take advantage of it. But without knowing what Congress is going to do, I don't think people should really make a move at this point.
Benz: Okay. Wait for more clarity.
Dogu: Wait for more clarity.
Benz: Okay. Well, thank you, Laura, always great to hear your insights.
Dogu: My pleasure. Thank you for having me.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.