How Much Money Do You Need to Retire in Orange County?

David K. MacLeod, CFP®, CFA

Do you remember seeing the television commercial several years ago that had people walking around with a retirement number attached to them? It’s an image that the advertising folks knew would stick. The insurance company behind the advertisement wanted people to go to their website to answer several questions. Their online calculator would output the exact dollar amount that person needed to retire.

We agree with using calculators and spreadsheets as a starting point in retirement planning. But there are more factors to consider beyond a simple dollar amount on the day you retire. And while a number may be motivating to some, it may seem overwhelming to others. We encourage you to thoughtfully approach retirement planning, focusing on the things you can control and re-evaluating your plan regularly.

Here are 12 areas to consider as you invest toward your retirement goal.

1. Lifestyle

What will life look like when you’re no longer working? As we often say, free time is expensive. The 40-plus hours you spend at work might be keeping you from spending more than you otherwise would in money. Often, new retirees will increase their expenses in the first few years as they travel more and enjoy life.

If you’re calculating your expected retirement spending based on pre-retirement spending, you may be underestimating your annual income need in the first few retirement years. Your lifestyle and annual income needed in retirement are an important part of the calculation.

2. Retirement Age

When will you retire? If you retire young, you may need a lot more than you think. By working longer, you’re able to delay spending and continue saving—a double bonus. But it’s important to consider that health or other factors may force you to retire sooner than you want to.

3. Inflation

What do you expect inflation to be in the coming decades? Are your primary expense categories (i.e., housing, health care, travel, food) exposed to inflation?

Inflation is like the heart disease of financial planning. It builds slowly, and then suddenly you realize there’s a problem. It’s best to plan on inflation so there isn’t a surprise down the road.

4. Housing

Where do you live, and do you plan to move? Housing costs can be a lot higher in places like Orange County, especially if you plan on remodeling at retirement.

If you live in a high-cost-of-living area in Southern California (e.g., Fullerton, Huntington Beach, or Costa Mesa), perhaps you plan to downsize or move to a location with a lower cost of living. If so, the amount of equity you take out of your house can be factored in if it will be invested toward your retirement goal.

5. Debt

Will you carry debt in retirement? The fastest-growing segment of student loan borrowers is those in their 60s. At last count, borrowers in their 60s, including many who took out loans for their children, owed $86 billion in student loans.

For peace of mind, many people choose to pay off all debt before retirement. If the payoff funds come from money earmarked for retirement, they should be considered in your projections.

6. Social Security and Pensions

Aside from investments, what are your other sources of retirement income? Social Security benefits and private or public pension income reduce the amount you need to draw from investments.

Consider whether your pension offers an annual cost-of-living increase. While the percentage increase may look small, it can add up and make a big difference over time.

7. Taxes

Where are your investments held? Your investment mix between pre-tax [traditional IRA, 401(k), 457], post-tax (individual, joint, or trust titled), and tax-free [Roth IRA, Roth 401(k)] will make a significant difference to your after-tax spending amount in retirement.

8. Health Care

As we age, health care costs can rise significantly, especially if there’s a need for long-term nursing care. Health insurance premiums before age 65, when Medicare begins, may be a lot higher than expected.

It’s wise to compare your current annual health care expenses with what you expect in retirement and consider whether long-term-care insurance is appropriate for you.

9. Life Expectancy

The average life expectancy of a man who is currently 65 is age 83. For a 65-year-old woman, it’s age 85. However, the joint life expectancy of a married couple is about age 90. In other words, half of married couples will have a surviving spouse live past age 90.

Many retirees at age 65 should plan on retirement lasting 30 years. All else equal, a longer life expectancy reduces the amount you can draw from your investments each year.

10. Rate of Return

How much do you expect your investments to earn for you? At a basic level, returns for diversified investment portfolios are driven by the mix between equities and fixed income.

This mix should be aligned with your risk tolerance. If you have a higher tolerance for holding on to investments through steep declines, a higher allocation to equities may be appropriate. If you have a hard time stomaching losses, a larger weight to fixed income may be appropriate.

Investment returns are never steady and predictable, and there’s no silver bullet to investing. Averages are just that—averages of the inevitable swings up and down. But with a diversified and careful approach to investing, you can make a reasonable estimate of your rate of return.

11. Pre-Retirement Saving

How much are you saving toward retirement? Are you maximizing the tax-favored retirement savings options offered by your employer? This is one of the most important factors when calculating your estimated retirement goal.

12. Estate Planning

Do you plan to leave money to children or charity when you pass away? If that’s important to you, we encourage you to factor in an amount that you wish to leave to your heirs.

There’s no “one size fits all” approach to retirement planning. The amount of money one person needs for retirement isn’t always comparable to what another person needs. Feel free to call us to schedule an appointment with one of our financial advisors for an initial assessment of your retirement plan.

Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.