The New Math: How Much Money You'll Need to Retire

Why Northwestern Mutual admits its own research is stupid

Ric Edelman: It's Tuesday, February 7^th. At 3 p.m. today Eastern time, I'm hosting a one-hour webinar. What's Coming for Crypto in 2023. We're going to talk with Matt Hougan of Bitwise Asset Management and tell you whether crypto is going to go mainstream this year, whether the crypto winter is finally coming to an end. Are we going to see new laws and regulations as a result of FTX? Is crypto going to hit all-time highs or fall to new lows? We'll cover all of this and a lot more. 3 p.m. Eastern time today. This event is for financial advisors, it's free. You can register right now at DACFP.com.

Let me ask you this, how much money do you need in order to retire in financial security and comfort? There's a new survey out from Northwestern Mutual. And unfortunately, like so many other surveys in the financial services industry, this one is just downright stupid. They even said so themselves.

Northwest Mutual surveyed 2,400 adults across the country, and they concluded, based on all the answers they got, that you need $1.25 million in order to be able to retire comfortably. That's ridiculous. Of course, the amount of money you're going to need to retire depends entirely on how much money you spend every year and how much of that you get from Social Security and pensions. $1.25 million dollars can produce $50,000 a year forever.

So how much do you need to accumulate? If all you spend is $50,000, you don't need $1.25 million dollars because you probably get $20,000 from Social Security. And if you're married, that's $40,000 from Social Security, meaning you don't need $1.25 million. You only need a quarter of a million in order to retire comfortably. But if you spend $150,000 a year, then you need $3.25 million a year, not $1.25 million. In other words, the amount of money you'll need to retire depends entirely on your lifestyle. And Northwest Mutual says exactly that. 

Christian Mitchell is the chief customer officer at Northwestern Mutual. And he said, "The amount of money a household will need to retire depends on many variables, including where people live and their standard of living. Whether a person expects to care for parents or children in retirement are also factors to consider. $1.25 million for some households, that may be right. It might be too high. It might be too low."

Thanks, Captain Obvious. So here's the deal. The best way to find out how much money you'll need is to get a comprehensive financial plan from a financial planner. But if you want a quick way to tell, here's how to figure it out. How much money do you spend right now on a monthly basis? Just look at your checkbook and your credit cards to see now. Divide that by 0.6. This will adjust your spending for taxes because if you earn a dollar, you don't get to spend a dollar. You need to figure that you're going to lose, say, 40% of your income to taxes, federal income taxes, state income taxes, property taxes and so on. 

So take your monthly spending and divide by 0.6. Now multiply your answer by 12. That tells us how much money you're going to need on an annual basis. Next, subtract what you're going to get from pensions and Social Security. Now you've got a final number and all you need to do is multiply it by 25. That's how much money you will need to retire comfortably.

Let me give you an example. Let's say you spend $5,000 a month. Divide that by 0.6 and you get $8,333. You multiply that by 12 and you get $100,000. Now subtract $24,000 for Social Security. I'm making up that number. And that leaves you with $76,000. Multiply that by 25 and you get $1.9 million. So if you spend $5,000 a month and you get $2,000 a month from Social Security, you need to accumulate $1.9 million to be able to retire comfortably. But if you spend twice as much as that, you'll need $4.4 million.

Now, there is one decent benefit from this stupid press release from Northwestern Mutual. If nothing else, they're drawing attention to the fact that you're going to need a lot of money in retirement. Probably a lot more than you think. 

And it's even worse than I've suggested because I told you to use your current expenses as a baseline. But what if you're going to need long-term care? Or what if your parents are going to need it? Or what if adult children run into problems in the future, when they are in their 40s or 50s (and you're in your 60s or 70s or 80s)? What if they divorce or they lose their jobs or one of them needs major surgery, or you need to help your grandkid get into rehab or out of prison. You could end up needing to spend a lot more every month than you currently spend.

And if that isn't all bad enough, Northwestern Mutual gives us in their survey one really important statistic. Despite the millions of dollars you might need to retire in comfort, the average retirement account balance in this country is only $86,000. Even for those who are ages 45 to 54, the average 401k balance is only $160,000. In other words, you have to amass an awful lot of savings if you want to live well into your 90s or 100s. 

So it's pretty clear. However much your saving, you need to save more, however much you have in stocks, real estate, crypto - increase it. However much you're spending, lower it and you need to do all of this starting right now.

And if you're a financial advisor, make sure your clients are doing all that and make sure they are realistic about their retirement plans, The age they plan to retire, and the amount they're going to be able to spend. Too many people are too unrealistic, and it's your job to make sure they get it right.

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