How Much Do You Really Need To Retire?

Includes: JNJ, KO, PG, SYY, XOM
by: Doug Carey

Who hasn't heard a number kicked around when it comes to how much money they will need to retire comfortably? I've heard everything from $500,000 to $6 million. Many of our friends and even writers and pundits are simply making an educated guess or have perhaps run through the numbers in a spreadsheet.

There is a better way to quantify just how much a person or a couple will need in order to retire comfortably and not run out of money. We can also analyze how a person or couple can change their investment strategy today in order to increase their chances of hitting their target number in retirement.

It is surprising to many just how large of an impact a change in investment strategy can have. I have consistently recommended that those who are under the age of 50 should have a heavy weighting towards dividend paying stocks that have a strong track record of increasing their dividends over time while avoiding long-term fixed income while interest rates are at historic lows.

Let's start with a relatively young couple that is 40 years old and plans on retiring when they are 65. I took a look at their situation using our retirement planning application. I started with these assumptions: They currently have $200,000 in investments and contribute $5,000 a year to savings. They are 75% in equities and 25% in fixed income. Equities return 5% per year and fixed income returns 2% per year. Inflation is 3% and their expenses in retirement will be $40,000 per year. They will receive a total of $25,000 in social security payments per year starting at age 65. All of their investments are in tax-deferred accounts and they assume they will both live to be 100 years old. Note that all of these numbers are in today's dollars. Here is what I found:

Investment Value At Retirement (In Today's Dollars)


Age When Funds Run Out


Investment Value At Age 100 (In Today's Dollars)


With the assumptions we used, this couple is projected to run out of money when they are 107 years old. By age 100 when their plan ends they will have a small amount of funds left, about $40,000, in their investment accounts. So in this scenario the answer seems to be that a typical 40 year old couple will need $656,000 (in today's dollars) to retire fairly comfortably.

Given how little is left in their investment accounts when this couple hits age 100, it is natural to ask how their funds last until age 107. The answer is social security. Their social security payments will cover over half of their expenses in retirement and this could be a major problem for people that are in this age bracket.

We all know by now that the social security trust fund won't last too much longer using today's rules and laws. In fact, it is projected to not be able to make full payments starting in 2036, which is coincidentally just one year before this couple retires. It is estimated that social security payments would have to be cut by 25% across the board starting in 2036 in order for the fund to maintain itself.

So what happens if social security is reduced for this couple? Let's take a look at some scenarios:

Reduction in Social Security

Age When Funds Run Out









Social security being reduced would be a serious problem for this couple. In the more dire projection of social security being cut by 25%, they would run out of money at age 91 instead of age 107, which we calculated in the base case.

If social security is indeed slashed by 25%, how much money would this couple need at retirement in order for their funds to last until age 100? After running a few iterations I found the answer to be $915,000. This is nearly $260,000 more than we thought they needed before we reduced social security.

Tough to predict variables such as the state of social security, inflation, and stock market returns make it difficult to figure out just how much people might need when they retire; hence the wildly volatile projections from different sources.

So what are people to do in today's environment if they can't accurately forecast how much money they will need? My opinion is that we should all be using relatively conservative assumptions for total return projections and we should not assume we will get 100% of our promised social security benefits, at least starting in 2036.

The couple I analyzed here was using relatively conservative return assumptions and we saw how much they will need if social security is reduced by 25%. So let's assume they will in fact need $915,000 to retire. What can they do now?

Save more- This couple is relatively young and has time on its side. If they begin saving more today they will have the power of compounding working for them over many years. I found that if they double their savings per year from $5,000 to $10,000 they get more than halfway there. They would have $820,000 at retirement rather than only $656,000.

Invest for the long-run in solid dividend paying stocks- The core of my retirement portfolio is a foundation of dividend paying stocks that have had consistent dividend growth over time as well as low payout ratios and low debt. Five of the companies that make up this part of the portfolio are Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), Exxon (NYSE:XOM), and Sysco (NYSE:SYY).


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Besides having in common their relatively strong dividend yields and growth rates, these companies have also shown a commitment over long periods of time to keep growing their dividends. Over time, consistent dividend growth will lead to solid total returns even if stock prices fall during the investing period. By finding great companies who increase their dividends over time, I believe this couple can raise their annual total return on equities from 5% to 7%. If they can do this, their investments will total a little over $1 million when they retire, which gives them the buffer they need to retire comfortably and not run out of money until well after they are 100 years old.

Before thinking about strategies on how to extend your money in retirement and retire comfortably, all of us need to think about the potential issues out there that might trip us up in our projections. The world has changed and there are more things to take into account when planning for retirement. But it can be done and those who prepare for the future without using extremely rosy projections will be better off for it.

Disclosure: I am long PG, SYY, XOM, JNJ, KO.