How much do I need to retire?

How much money you need to retire depends on many factors. These include when you want to retire, how comfortably you want to live once you’ve stopped working, what the condition of your health is, and whether you might want to hold down a part-time job as a retiree—either to bring in extra income or just to keep busy.

Retirement experts offer a variety of guidance about how much money you need to retire. Some say you need up to 80% of your pre-retirement income for each year of retirement. Others say you need 10 times your annual salary by age 67, or anywhere from $1 million to $1.5 million. But ultimately what truly matters is that you figure out how much you need with the help of a financial professional.

Key takeaways

  • Retirement savings can be approached in a number of ways, such as allocating a total of up to 80% of your pre-retirement income for your post-work life.
  • As part of your retirement calculations, consider factors such as your life expectancy and your desired retirement lifestyle.
  • Look into wiping out non-mortgage debt, such as credit cards and personal loans, well ahead of your retirement date.

Estimate your ideal retirement income

Several “rules” are floating around regarding the ideal amount of retirement income. Here are four of them:

  1. You need a total of 80% of your pre-retirement income to enjoy a standard of living similar to the one you’re enjoying now. If you’re at least 10 years away from retirement, this formula might work for you. However, some critics say the 80% recommendation is outdated.
  2. You need a total of 70% to 90% of your pre-retirement income to maintain your standard of living during retirement. This, of course, gives someone more wiggle room than the 80% rule does. Keep in mind that Social Security benefits generally make up 40% of your pre-retirement income.
  3. Save 10 times your annual salary by age 67. If you adhere to this rule, you could conceivably save enough money to maintain your current lifestyle after retirement. This formula likely will need to slide up or down based on your retirement age. For instance, you might need to put away eight times your annual salary if you plan to retire at age 70 or 12 times your annual salary if you’re targeting a retirement age of 65.
  4. Save 10% to 15% of your pre-tax salary each year. This is another way of slicing and dicing your retirement goal. Instead of looking at it as a share of all of your pre-retirement income, this approach breaks it down into annual bites.

Regardless of which rule you settle on, keep these factors in mind:

  • You might need 100% or more of your current income to live the retirement of your dreams. However, you might be able to live well on, say, 50% or 80% of your pre-retirement income.
  • The typical American spends more than 20 years in retirement. So you’ll want to make sure your retirement savings last as long as your retirement might.
  • The kind of lifestyle you plan to lead will play a key role in how much money you need to set aside for retirement. If you’re a globetrotter and hope to continue traveling the world, you’ll likely need more money to sustain your lifestyle than if you envision being more of a homebody.
  • In 2020, the average life expectancy for Americans was 77 years.

Calculate how much you need to save for retirement

To help you calculate how much you might need to save for retirement, consider the following steps:

1. Estimate your expenses
When you’re coming up with an idea of how much money you’ll need in retirement, don’t forget to look at these costs:

  • Health care expenses: According to a 2022 report from the Employee Benefit Research Institute (EBRI), nearly 40% of retirees said their health and dental expenses were higher than expected. The Fidelity Retiree Health Care Cost Estimate indicates an average 65-year-old retired couple may need about $315,000 saved to cover health care expenses in retirement.
  • Housing: Data from the U.S. Bureau of Labor Statistics shows that for 2019-2020, the average American 65 and over spent $17,454 per year on housing. That works out to almost $1,455 per month.
  • Food: In 2019-2020, the average American 65 and over forked over $6,137 per year for food, which translates to more than $511 per month.
  • Entertainment: For 2019-2020, the average American 65 and over spent $2,366 per year on entertainment, or a little over $197 a month.
  • Travel: In 2022, Americans 70 and over planned to earmark $11,561 for travel, which works out to more than $963 a month.
  • Debt: A 2020 survey from Clever found the average retiree had about $19,200 in non-mortgage debt, such as credit cards.

2. Consider the 4% rule

The 4% rule dictates that a retiree should withdraw the equivalent of 4% of their savings in the year that they retire, then adjust that percentage for inflation every year over a 30-year span.

Although the 4% rule might be a useful guideline, it might not accurately reflect increases in health care costs, changes in the stock market or adjustments in tax rates.

3. Evaluate additional income, including work and investment returns
As you look at your monetary needs in retirement, don’t overlook the possibility that you still might be working. Also, be sure to consider what your investment returns will be.

In some cases, your retirement calculations might include income from work, even though you’re technically retired. A 2022 survey from EBRI showed 70% of American workers expected to work even during retirement, yet just 27% of retirees reported doing so. 

Now, when it comes to investment returns, a look back at history can be helpful. Since 1926, the S&P 500 has delivered a return on investment of 10.09%. However, when taking inflation into account, the return was 6.92%. The S&P 500 index tracks the performance of 500 of the top publicly traded companies in the U.S.

4. Calculate your future Social Security benefits
One math equation you don’t want to skip is how much your Social Security income will be when you retire.

The U.S. Social Security Administration provides a free calculator that lets you add up your estimated Social Security benefits at age 62, at age 70 and at your “full retirement age.” Your full retirement age is when you become eligible for Social Security benefits that won’t be reduced because you started taking those benefits earlier. This age depends on the year you were born.

It’s worth noting that some workers doubt they’ll be able to receive any Social Security benefits when they retire. In a 2022 survey commissioned by Nationwide, 70% of adults 26 and over said they worried that the Social Security system will run out of money in their lifetimes.

5. Determine how much to save
It’s best to seek the advice of a financial professional to set your retirement goals. But if you’d like to get a rough estimate of how much to save for retirement, take a look at the following formula. Just remember that a lot of variables can throw off this estimate, such as health care costs and investment returns.

  • Monthly budget: $4,500
  • Multiply your monthly budget by the number of months in a year to come up with your annual budget: $4,500 x 12 = $54,000
  • Multiply your annual budget by 25 (estimate years of retirement): $54,000 x 25 = $1.35 million

Note that this scenario assumes annual investment returns of 6% and annual spending at your current level.

Open and maintain retirement savings accounts

To ensure you’re on track for retirement, it’s wise to set up retirement accounts. Common retirement accounts include the following:

  • 401(k): A 401(k) is an employer-sponsored retirement account that lets you make a certain amount of contributions that may or may not be matched by your employer.
  • Solo 401(k): A solo 401(k) allows a business owner who has no employees, along with the business owner’s spouse, to put money into a 401(k).
  • Traditional IRA: A traditional IRA allows you to set aside a certain amount of money per year for retirement. This money is contributed before taxes are taken out. Earnings and withdrawals eventually are taxed.
  • Roth IRA: A Roth IRA enables you to save a certain amount of money per year for retirement. Money you put into a Roth IRA already has been taxed, so earnings and withdrawals generally aren’t taxed.
  • SEP IRA: A simplified employee pension (SEP) plan lets employers contribute to a traditional IRA (SEP IRA) set up for employees.
  • 403(b): A 403(b) is a tax-sheltered retirement plan offered by public schools and some tax-exempt organizations.

Working toward other financial goals while saving for retirement

Working toward other financial goals while saving for retirement is a bit of a juggling act. But it certainly can be done.

Here are three tips for accomplishing that:

  1. Focus on reducing debt. When you’re retired, you want to make life as carefree as possible. Therefore, it’s smart to reduce debt well before you get to that point. One way to do this: Take on only those debts that you plan to pay off before retirement. These typically should include credit cards, personal loans and car loans, but not necessarily mortgage loans or student loans.
  2. Pay attention to your emergency fund. It’s best not to sacrifice shorter-term needs for longer-term gains. Therefore, you’ll likely want to maintain an emergency fund while also stashing cash for retirement. Generally, experts recommend that an emergency fund contain enough money to cover three to six months’ worth of household expenses.
  3. Automate your savings. Just as you might put your monthly bills on autopay, you could automatically set aside money for both retirement and emergencies on a regular basis.

Retirement savings in a nutshell

There’s not necessarily a right or wrong way to save for retirement. Rather, your retirement savings program should fit your current needs and future plans.

Still, there are guidelines that can help you make the most of your retirement quest. For instance, you’ll want to estimate how much your expenses will be after you retire and align that projected spending with how much money you need to save now (on a percentage basis, for instance) to retire comfortably. Doing some basic math and visiting with a financial professional can put you on the path toward your ideal retirement.

Learn how to start saving for retirement today.

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