How much to save to retire in the Bay Area
Living on a fixed income depends on individual lifestyle, experts say
Welcome to Hella Expensive, a new column that’s aimed at helping readers navigate the financial aspects of living in the Bay Area. I’ll be keeping an eye on current issues, trends and what’s going on with the overall economic outlook — but I also want to hear from you. Email your financial questions and concerns to me at kellie. hwang@sfchronicle.com.
Are you planning to retire in the Bay Area?
Just thinking about saving for the “golden years” can be stressful, but if you’re planning to spend your retirement in the Bay Area, financial experts say it’s likely to be even more anxietyinducing.
“It’s the high cost of living,” said Brian Stormont, managing partner and financial adviser at Insight Wealth Strategies in San Ramon. “It’s really expensive to live here, and that can mean many people have to push back their retirement dreams in order to make the numbers work.”
So how do you know which numbers will work for you? Answering that question usually starts with a retirement calculator (like one from AARP or one from NerdWallet) — but do those calculations hold up for the Bay Area?
To find out if the traditional advice is really applicable here, I looked at the numbers and then talked to financial planners about what makes retiring in the Bay Area unique.
Average retirement costs
A recent study from online lending marketplace LendingTree took estimated annual expenses of retirees and average Social Security benefits for each state, and then applied the “4% rule” to come up with the savings someone would need in each U.S. metropolitan area to retire. It found that a person would need more than $1 million to retire with an “average” lifestyle in just over onethird of U.S. metros.
In the San Francisco metro area, it would take an average of $1.37 million — nearly 40% higher than the national average and the largest amount among all U.S. metros. Unsurprisingly, California cities dominated the higher end of the list with 12 of the top 20 metros requiring the biggest nest eggs to retire.
Stormont reviewed the study and said the methodology is sound, except for one issue when applying the 4% rule, which says spending in your first year of retirement should be about 4% of your savings. It has its limitations, especially if you consider life in the expensive Bay Area.
“So, if I have $1 million in savings, I’ll start with a $40,000 withdrawal,” Stormont explained. “However, I don’t see anywhere that they are accounting for inflation. That initial $40,000 might be nice to start with, but five or 10 years later, it may not be nearly enough. Factoring in inflation would certainly increase how much you’ll need at the start.”
The ‘25x’ rule of thumb
While $1.37 million may be a good number to keep in mind, financial planners say your number is dependent on personal lifestyle, needs and expenditures.
Ariana Alisjahbana, lead adviser with North Berkeley Wealth Management, offered another “good rule of thumb” for most people to start with that’s more personalized: 25 times your annual expenses.
“It’s possible for middle-income individuals and families to retire in the Bay Area, especially with a paid-off home or a type of arrangement with predictable housing costs, such as rent control,” Alisjahbana said. “According to the California Department of Finance, nearly 21% of San Francisco’s population is above 65, so plenty of people are currently retired in the Bay Area.”
“The longer answer is it really depends on the person,” Stormont added. “I have worked with doctors who have millions socked away and still can’t afford to retire at 65 because of their high-cost lifestyle. And I have worked with school cafeteria workers who are able to retire at 65 with only a few hundred thousand dollars because they don’t need as much income.” No. 1 variable: Your home
Michael Castro, senior wealth adviser for Marin Wealth Advisors, said from his perspective, the “No. 1 variable is housing costs.” Those who are “fortunate enough to own their own homes” are already ahead, he said.
“If you own your home, you’re kind of in the driver’s seat and it doesn’t really matter what interest rates do,” Castro said.
He also noted that many people in past years have been able to refinance their loans to under 4%, and now they’ve “locked in those rates for 30 years.”
“It’s not a rising cost and not subject to inflation,” he said. “For those just trying to get into the housing market now, it’s much more expensive because of higher interest rates.”
Retirees will often downsize from larger homes to smaller ones, especially when they become empty nesters, which helps save on maintenance costs and money overall.
Additionally, homeowners have a relatively new tax break courtesy of Proposition 19. The measure, approved by California voters in 2020, greatly expanded the ways people over 55 can sell their primary residence and transfer its assessed value to a new one, rather than having the new home reassessed at full market value.
“These days, if they want to remain in California, a lot of clients are happy to learn that Prop. 19 generally allows them to take their very low property tax basis to their new, smaller home,” Stormont said. “Also in the process, many are often then pocketing a lot of cash that can help to fund retirement.”
However, Alisjahbana said this strategy may be far more difficult in the Bay Area than elsewhere given sky-high home prices, high taxes upon selling a long-held property, and locked-in low property taxes. “For people who have owned their homes for decades in the Bay Area, downsizing often means paying the same amount of money for a much smaller and less nice house.”
And, of course, many people may not want to downsize. For those who want to stay in their current homes, Stormont said a typical retirement model shows they may need to work as much as another 10 years to do so.
“That client often then asks what the numbers look like if they sell their home and downsize, oftentimes either out of the Bay Area or even out of state,” he said. “We’ll rerun the numbers under that new scenario, and almost every time it comes back showing they can retire immediately.” 401(k) savings and the ‘mega Roth strategy’
Experts say anyone who wants to retire in the Bay Area should save a higher percentage in their 401(k), and contribute the maximum allowed if their cash flow allows for it. For those under 50, that threshold in 2023 is $22,500 and $30,000 for individuals over 50.
“The good news about the Bay Area is that residents here often have higher incomes than most of the country,” Alisjahbana said.
Stormont said he advises clients to save at least 10% of their gross income, and building that habit in younger years is important.
“If they can start with that mindset in their budget, it can make an enormous difference,” he said. “Then, when life’s occasional setbacks come along, that person may pull back from saving for a bit, but we really try to encourage them to get back on the savings plan.”
He added that younger people can be more aggressive with their investment allocations, while those closer to retirement will “likely want to dial that risk down.” And if a person can save beyond their 401(k), “all the better.”
“In that case, we often look to help clients set up a mega Roth strategy, where they save after-tax supplemental dollars into their company 401(k), and then transfer those aftertax dollars to a Roth IRA,” Stormont said. “This strategy has no income limits and can help clients build significant tax-free savings.”
Starting to save earlier allows compound interest to work in your favor, because “the earlier you start saving for retirement, the less you must contribute,” Alisjahbana said.
“For example, to have a $2 million nest egg by age 65, a 30-year-old would need to save $1,208 a month assuming a 7% growth rate,” she said. “If the same person starts later, for example at 45 years old, they need to save more than triple the amount — $4,070/month — to arrive at the same nest egg at the end.” Taxes don’t go away
Another hurdle to prepare for is your tax bill. Stomont said many new clients think that “taxes just go away” after they retire, and are surprised when they realize “their tax bill will change little once they stop working.”
“The reason is often that the client diligently saved into their 401(k) with pre-tax savings, but that means that every penny that eventually comes out is taxable as ordinary income,” he said.
He encourages clients to save into pre-tax, Roth and after-tax accounts to “diversify their tax base.”
Long-term care costs can also blindside retirees down the line, especially for those who haven’t dealt with it firsthand, Alisjahbana said. Medicare offers little to no long-term care benefits.
“At North Berkeley, we have seen many clients spend upwards of ($10,000 a month) for caregiving expenses, depending on the level of care they need and whether they choose to bring it in-house or move to a senior living community,” she said. “This figure goes up fast and can easily jump higher if someone needs memory care for dementia or Alzheimer’s.” What about Social Security benefits?
Figuring out when to start taking Social Security benefits can be a complicated decision.
“Today most beneficiaries are able to start their benefit at age 62, but can delay for a larger payment all the way to age 70,” Stormont said. “So the longer you live, the more beneficial it is to delay the start.”
But of course we don’t know exactly when we will die, even taking health history and family genetics into account. In the U.S., the average life expectancy is 76 years, according to 2022 data from the Centers for Disease Control and Prevention’s National Center for Health Statistics. So Stormont said advisers at his firm usually encourage clients to push back the start of benefits.
“Here in the Bay Area, many retirees maintain a very fit and active lifestyle,” he said. “The hard part is figuring out if you can afford to retire at 62, for example, but wait to start your benefit until age 70. That gap between when you stop receiving paychecks and then you begin Social Security has to be looked at very carefully.” When should you consult a financial adviser?
If you’re financially savvy and already have a financial plan ready to go, expert advice may not be necessary.
“Anyone trying to manage this on their own needs to be comfortable with investing,” Stormont said. “When markets get scary, like they did last year for example, it’s easy for novice investors to make mistakes out of emotion. Having a plan and sticking to it is really important.”
If you don’t know where to start with planning or investing makes you nervous, then experts advise talking to a financial planner. Castro said he thinks the ideal times to seek advice are when you become a new homeowner or when you have children, which should give “plenty of time to course correct or be put on a course.”
But even if you’ve been putting it off or think it’s too late, it’s better to figure it out now with what you have, rather than to be blindsided in the future.
“Unfortunately, the one thing you can’t get back is time, so if you wait until your mid-50s to save for retirement, you will have missed out on those earlier years to save and have those dollars be invested and growing,” Stormont said.
“If you are committed to retiring in the Bay Area, prioritize increasing your income over your career and saving a good portion of it for retirement,” Alisjahbana said. “Nothing destroys retirement readiness more than uncontrolled lifestyle inflation. When you receive a raise at work, give yourself and your savings a raise too.”