How much money do you need to retire?

As a financial adviser, I am frequently asked: How much money do I need to save to retire comfortably? In other words, what is my number?

Much has been written about this topic. Schwab recently released a survey of 1,000 401(k) participants across the country indicating that on average, Americans believe they need $1.7 million to retire. That may seem like a reasonable number, but is it?

A recent CNBC poll showed that two-thirds of U.S. workers are either very or somewhat confident that they will be able to live comfortably throughout retirement. However, the 2019 Retirement Confidence Survey Summary Report by the Employee Benefit Research Institute showed that only 42 percent of Americans have done any retirement calculations. And on top of that, according to Fidelity, the average 401(k) balance in the U.S. is $297,700 a far cry from $1.7 million.

So, where is the disconnect, and how can you actually determine what your own retirement number is?

Although every person’s situation is completely different, there are five universal considerations when determining how much you need to save for retirement. The impact of underestimating any of these factors could be catastrophic, so this is not the time to be overly optimistic about your retirement readiness. This is the time to be clear-eyed about setting your goals and expectations. Let’s get started.

Question 1: How much money will you spend when you retire?

No one likes to compile a budget, so try to avoid using that word and think instead about how you spend your money. There are many online tools that can help you get to this number fairly easily without pulling out a pencil and paper and spending tedious hours poring over bank statements. Do not assume that you will spend less at retirement. In fact, many spend more (at least initially) on travel, entertainment and the like. Determine the lifestyle you want and then calculate what kind of monthly income that will require.

Question 2: When will you retire?

Again, be realistic about this. The study from the Employee Benefit Research Institute also showed that 34 percent of workers expect to work until at least age 70 although only 4 percent actually do. Other things tend to get in the way of working longer, such as unexpected health problems of the worker or a family member and corporate downsizing. Make sure to build in a cushion for this. Look at working until age 70 as a luxury that you may be able to accomplish but build in a contingency for potentially retiring earlier. Regardless of the reason, if you retire earlier, you will need to have more money saved because you will have less time to contribute to your nest egg.

Question 3: How long will you live?

It is important to not underestimate your lifespan. Consider your own health as well as your family history. According to AARP, the fastest growing segment of the U.S. population are those over age 85 and the second fastest growing segment are those over 100. In our own firm, we assume a longevity of 95 years for everyone. Living a long, healthy life is a blessing but don’t let it be marred by financial stress because of shortsighted longevity planning.

Question 4: What will your healthcare needs be?

A related note to longevity is healthcare costs. According to a 2019 study by Fidelity, the average American retiring at age 65 will need $285,000 to cover their medical expenses through retirement. That puts a big dent in your retirement nest egg! Healthcare costs have been outstripping inflation for many years and are highly unpredictable. That is why medical bills are the No. 1 cause of bankruptcy in the U.S. Furthermore, building in a cushion for healthcare expenses is a critical part of retirement planning.

Question 5: What will the impact of inflation be during retirement?

Although inflation has been hovering around 2 percent for the last 10 years, over the last 50 years it has averaged 3.67 percent. That may not seem like a big difference, but it does have a big impact on retirement. An inflation rate of 3.67 percent means that your cost of living will double approximately every 20 years. And that does not take into account things such as healthcare expenses, which are increasing at a faster rate.

The bottom line is that no matter how much you save, your investment portfolio needs to be positioned to stay ahead of inflation in order to maintain the same buying power throughout your lifetime. To provide for your spending needs over a potentially long life, you will need some exposure to both the equity markets and the bond markets. This will help your portfolio keep pace with inflation and generate the income needed during retirement while cushioning market volatility.

All of this is to say that retirement planning is not really about a fixed, one size fits all number. It is being realistic about your own goals and expectations while determining what will give you the peace of mind so your retirement years are exactly what you desire.

Julianne F. Andrews, MBA, CFP, AIF is a principal and co-founder of Atlanta Financial Associates. She specializes in working with physicians and executives in the healthcare industry. Her passion for working with physicians comes from being a pediatrician’s spouse for more than three decades. If you have questions about retirement planning, Julie can be reached at jandrews@atlantafinancial.com