The first issue in retirement planning

Two questions I hear a lot from people who aren’t retired are: “When can I retire?” and “How much money do I need to retire?” They’re really variations of the same question. It’s the wrong question to ask, because most people approach the retirement-date question from the wrong direction.

My answer usually is that a person can retire whenever he or she wants. The real issue is what the standard of living will be. Imagine two people with identical lifetime incomes who saved the same amount and earned the same investment returns.

Let’s also suppose that they have very different tastes and ambitions. One of them wants the dream retirement that includes at least one very nice home in an exclusive retirement community, a lot of travel, big gifts for the grandchildren, and more. The other’s ambition is a retirement that’s less of everything.

In this hypothetical situation, the first person needs to accumulate a much larger retirement portfolio than the second person. The first person is going to have higher retirement expense and a lot more overhead. Since the two have identical incomes, savings and investment returns, the second person can retire earlier than the first person.

Most people unfortunately believe that there’s a formula that determines how much money they need to accumulate for retirement. Some are told that they need to be able to spend a certain percentage of their pre-retirement income, usually around 80%. Others are told they need to accumulate a retirement portfolio that’s a certain multiple of their pre-retirement income, usually 10 times their final working income.

Those formulas work for some people and probably work on average for the population. But they don’t work for every person.

Some people spend as much or more in retirement, especially the first years of retirement, as they did during their working years. Others spend less in retirement, and some spend far less.

You can’t know if you’ve accumulated enough for retirement until you’ve asked and answered the important first question of retirement planning: What lifestyle do you want in retirement?

Money shouldn’t be an end in itself. A good retirement plan doesn’t simply set up a monetary target as your pre-retirement goal. There should be a purpose to the money. You’re saving for retirement so that you’ll be able to do the things you want during those post-career years.

Before you start setting goals for savings and investment returns, you need to imagine the type of retirement you want. Where would you like to live? What activities do you want to engage in on a daily, weekly, monthly, and less frequent basis? How much do you want to support your children and grandchildren?

After answering these and other questions about retirement, you can do some research and develop an estimate of what the lifestyle will cost. From that you can estimate how much you need to save and the investment returns you’ll need to be able to pay for that retirement.

After this exercise, you might conclude that you need to work longer or save more. You might even need to adjust your dream retirement to match your finances. Or you might find that you can retire earlier than expected, because your nest egg matches your desired retirement.

This exercise helps with more than your retirement finances.

Some people find retirement is unsatisfactory, and they aren’t happy. That’s often because they viewed retirement as an end in itself. Instead, retirement is a time when you don’t have to worry about working to pay your expenses. But you need a purpose, or multiple purposes, in your daily life. Most people spent decades in which their jobs and raising their families were their main purposes. You need to establish new purposes. Imaging how you’ll spend retirement provides a way to estimate the cost of retirement. It also helps you determine what your purposes will be in retirement.

Financial independence in retirement is important. But you also should have a retirement life that is lived well. You should want to arrange your finances so you can achieve your goals and do the things you want. Most people are going to be retired for a couple of decades, and a substantial minority will be retired longer than that. It doesn’t take that long to catch up on projects around the house and take the bucket list vacation or two you’ve been planning. Before talking about when to retire, think about the life you want to retire to.


This article was written by Bob Carlson from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to