Written by: Greg Phillips, AIF®, CPFA®, C(k)P®
Every year, new headlines seem to tell us the same thing. One year it’s “You need $1 million to retire.” The next, the figure climbs to $1.5 million. Now some suggest $2 million is the new threshold for a comfortable retirement. Articles like these generate attention because they provide a simple answer to a complicated question. But in reality, retirement planning is rarely about hitting one universal balance that applies to everyone.
At Twelve Points, one of the most common questions we hear from employees and clients is: “How much do I need to retire?”
The honest answer is: it depends. Not because we are avoiding the question, but because retirement readiness is far more personal than any headline can capture.
Retirement Planning Is More About Income Than a Lump Sum
Many people focus entirely on the size of their retirement account balance. While savings are certainly important, the bigger question is: what kind of lifestyle will your income support in retirement?
Two people with the exact same retirement account balance may have completely different levels of readiness depending on their spending habits, retirement age, desired lifestyle, debt levels, healthcare costs, taxes, and other income sources like Social Security or pensions. Someone who spends modestly and has a pension may need significantly less saved than someone with high fixed expenses and no guaranteed income sources.
That is why retirement planning should focus less on chasing a “magic number” and more on understanding future income needs and spending expectations.
Building a Retirement Income Picture
When we work with clients, we typically start by understanding what retirement income may already be available to them. This can include:
- Social Security benefits
- Pensions
- 401(k) or 403(b) plans
- IRAs
- Brokerage or investment accounts
- Rental income or business income
- Part-time work in retirement
From there, we compare those income sources against projected retirement expenses to identify potential gaps. In many cases, clients are surprised to learn they may already have a meaningful portion of retirement income covered through Social Security or pensions alone. The goal is not simply accumulating the largest account balance possible. The goal is creating a sustainable income stream that supports the lifestyle someone wants.
Spending Matters More Than Most People Think
One of the biggest mistakes people make is assuming retirement expenses will automatically drop significantly. While some costs may decrease, others often rise.
Healthcare is one of the most significant examples. Even with Medicare, retirees still face premiums, deductibles, prescription costs, and potential long-term care expenses. But the impact goes further than the bills themselves. Rising healthcare costs can affect how much income someone ultimately needs their portfolio to generate over time, making healthcare planning one of the most important and commonly underestimated parts of preparing for retirement.
Many people also underestimate:
- Inflation over a 20-to-30-year retirement
- Travel and leisure spending early in retirement
- Home maintenance and repairs
- Supporting adult children or grandchildren
- Taxes on retirement distributions
A realistic spending estimate is one of the most important inputs in determining retirement readiness. Understanding spending habits today is a critical part of planning for tomorrow.
Rules of Thumb Can Be Helpful, But They Have Limits
You have probably heard benchmarks like saving 10x your salary by retirement, or withdrawing no more than 4% per year once you stop working. These rules can be useful starting points, but they are not personalized financial plans.
For example, someone earning $300,000 per year may not need to replace all that income in retirement if a large portion currently goes toward savings or work-related expenses. On the other hand, someone with significant healthcare costs or limited guaranteed income may need more than general benchmarks suggest. Rules of thumb also cannot fully account for taxes, market volatility, or changing spending patterns throughout retirement. They are guideposts, not guarantees.
The Impact of Taxes in Retirement
Another factor often overlooked in headline-driven retirement discussions is taxes. Not all retirement dollars are created equal.
Traditional 401(k) and IRA accounts are generally taxable upon withdrawal, while Roth accounts may provide tax-free qualified withdrawals. Taxable brokerage accounts are treated differently as well. This means two retirees with the exact same account balance could have very different amounts of spendable income depending on how their assets are structured.
That is why we often focus on building tax diversification across account types, creating flexibility to manage income and taxes throughout retirement rather than facing unnecessary constraints when it matters most.
Market Risk Still Matters After Retirement
One important concept many pre-retirees have never heard of is sequence of returns risk. This refers to the danger of experiencing major market declines early in retirement while simultaneously taking withdrawals from investment accounts. Even if long-term market averages remain strong, poor returns in the first few retirement years can significantly impact how long a portfolio lasts.
That is why retirement planning should go well beyond accumulating assets. A comprehensive approach also addresses:
- Withdrawal strategies: Determining the order and timing of withdrawals across different account types to minimize tax drag and extend portfolio longevity.
- Portfolio diversification: Maintaining an appropriate mix of assets that balances growth potential with protection as spending begins.
- Cash flow planning: Building a clear picture of monthly income needs so withdrawals are intentional rather than reactive.
- Risk management: Adjusting investment risk over time to reflect the reality that early retirement losses can have an outsized impact on long-term outcomes.
Retirement Is Emotional, Not Just Financial
One of the most overlooked aspects of retirement planning is the emotional transition itself. Some people worry they will never have “enough,” even when they are financially prepared. Others may technically be able to retire but are unsure what retirement will look like without the structure, purpose, or routine of work.
Retirement is not simply a math equation. It is a major life transition. That is why planning conversations should go beyond investment balances and spreadsheets. They should help people gain clarity and confidence about the life they want retirement to support.
The Bottom Line
Headlines about the “perfect” retirement number may grab attention, but retirement readiness is far more personal than a single dollar figure. Instead of asking “How much money do I need?” a better question may be: “What kind of income and lifestyle do I want my retirement savings to support?”
The answer depends on the individual, their goals, and the life they envision for themselves in retirement. At Twelve Points, we believe successful retirement planning starts with understanding the person behind the number.
If you’re ready to move beyond the headlines and start building a retirement income plan that reflects your life, we’d welcome the conversation. Connect with the Twelve Points team today to get started.
PLEASE SEE IMPORTANT DISCLOSURE INFORMATION at www.twelvepoints.com/disclosure