How Much Money Do You Really Need For Retirement?

There's some standard thinking that you need about 70 to 80% of your final salary each year to live in retirement. But where did this number come from and more importantly is it actually accurate?

In the following video from CNBC, Dan Ariely - Professor of Psychology and Behavioral Economics at Duke University points out that this may not be the case.

When they conducted some research into this, they asked a group of people how they came up with this percentage. As it turned out, there wasn't any actual reasoning behind it. It was just a general rule that most people accepted as true.

They then worked with another group of people to do an actual calculation of what they would financially need in retirement based on their actual retirement lifestyle and plans.

What they discovered by doing this was that people required 130% of their final salary.

This is quite a significant gap.

One of the reasons given for this is that when you're working it's actually quite cheap. We are occupied for eight hours a day with limited opportunities to spend.

But when you are in retirement everyday can be like the weekend. And this can be expensive. Many people are not just satisfied going for a walk, watching TV or going fishing. They want to do expensive things. Go to different places, travel, eat in restaurants, etc.

So what are we to do?

Well, there are a number of different options:

Figure out your retirement lifestyle

The first place to start is to not take a cookie cutter approach to financially planning for your retirement. Build a retirement financial plan based on your specific retirement lifestyle interests, needs and wants. Figure out how much money you will really need to live the retirement that you want. And don't forget to calculate and include the potential healthcare and long term care costs that you may need to support you later in life.

Save more, make more or spend less

Once you have figured out how much money you really need for your retirement, if you have a gap you have a few options.

The first option is to simply work longer and save more before you retire. It may not be what you want to do but if you plan to live the retirement as you have defined it, it's an option.

The second option is to make money in retirement. Maybe continuing to work part time or starting a gig job will help with your cash flow in retirement to help fund what you want to do.

The third option is to just spend less. Reduce your spending so that you can either save more or reduce your plans in retirement in order to spend less.

Work with a professional

Planning for your financial retirement is a very important and potentially complicated activity. If you are not comfortable doing this, then seek out the services of a trusted and reputable financial services professional. 

Whatever you decide the message is clear. Don't just go into retirement without knowing what your plan and budget needs are. This can be a long time of our lives that we don't want to spend not being able to live life the way we want.

Here is the video;