How Much Do You Need to Retire?

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Saving for retirement is funny. We are told to start as soon as possible. So year after year after year, we save. But when is it enough? How much do we actually need? That's why you need a “retirement number.” Until you have a retirement number, you have no idea whether or not you're on track. In this guide, we'll try to figure out how much do you need to retire.

How Much do You Need to Retire?

You may have decades left until you're ready to retire. A lot can happen in those years. You could get married, have children, buy a house, etc. Or something horrible could happen, such as divorce or a family member getting sick. Add into the mix the fact that you've gotta pay bills, as well as events that are entirely out of your control, like recessions, stock market corrections, and wars.

So how much do I need in retirement? What's the easiest way to get the answer?

One method is to use 80% of your current expenses and multiply that by 20 to 25. This is a simple but potentially effective way to figure out how much savings you'll need.

Let's say you spend $60,000 a year. According to the formula, in retirement, you'll need approximately $48,000 per year to live. Now take that number and multiply it by 20 and 25 to figure out how much you'll need in savings, all told. The answer you'll get is $960,000 to $1.2 million.

Now, this formula isn't perfect. It's just a simple guideline. It doesn't consider Social Security, other fixed-income benefits, possible stock market returns, and other major life expenses. Let's go ahead and cover the steps to determining your retirement number, keeping a running example so you can see how the process works.

Step-by-Step Guide to Find Your Retirement Number

Step 1: Determine How Much You'll Need.

This step is to determine the lifestyle requirements. Experts say people need 80% of what they earn today for their retirement years. This rule of thumb is not perfect, but it's a good starting point.
So if you make $80,000 annually, this logic says you'll need $64,000 per year during your retirement. Using $64,000 annually, that's about $5,300 a month in gross income in retirement.
Contrast your current expenses with your retirement-age anticipated expenses in retirement.

Expense How will it change in retirement? Current cost Retirement cost
Mortgage It will be paid off by the time you retire! $1,400 $0
Healthcare You'll have Medicare, but overall costs will rise $200 $900
Taxes You'll still have to pay taxes but in a much lower bracket $1,600 $795
Cost of living Maybe you'll move to a location less expensive (food, entertainment) $600 $400
Student loans These will be paid off! $400 $0
Family Costs of raising children should be complete (clothes, school supplies) $300 $0
Travel With all this time on your hands, you'll need to account for travel $0 $2,000

So, in this case, your monthly expenses will be $4,095.

Keep in mind that these are just assumptions and are likely to change. For example, it's true your tax rate will likely be lower in retirement than it is today but remember this: 1. America has a lot of debt; 2. We are going through tax reform. In other words, overestimate your tax rate to be safe.

Step 2: Apply the “Safe Withdrawal Rate.”

Now it's time for math. There is something in retirement planning known as the safe withdrawal rate. It is the amount you can withdraw from your retirement savings without ever depleting your portfolio. Under the safe withdrawal rate, you should be able to withdraw 4% of your portfolio each year without your retirement funds ever running dry.

The theory is based on the fact that the stock market's historical rate (since 1926) is somewhere between 8% and 10% per year. So if you limit your withdrawals to only 4% when your portfolio is growing between 8% and 10%, you'll have an extra 4% to 6% to cover inflation and allow the portfolio to keep growing.

But how much will you need in your portfolio to be able to withdrawal only 4% to cover your monthly expenses in retirement?

If your retirement expenses are $4,095 * 12 months = $49,140 (annual income) divided by 0.04 = $1,228,500. So yes, to collect just over $4,000 per month, you need well over a million dollars in retirement accounts. To be safe, we'll round that up to $1.5 million for the rest of the steps.

Step 3: Don't Forget Inflation

One of the most significant variables in retirement planning is inflation. Not factoring in inflation can result in retirees coming up short. How do we calculate future inflation?

Let's say you're 40 years old and you want to retire in 25 years when you turn 65. Using the Bureau of Labor Statistics' Inflation Calculator, we can go back 25 years — to 1992 — to see what inflation has done to the dollar's value in that time.

By entering $1 as the value and 1992 as the year, we find that it takes $1.73 today to buy what $1 purchased in 1992.

Rounding $1.73 up to $2, we can reasonably assume that inflation will roughly double the amount of money that you need to have in your retirement portfolio by the time you retire. So $1.5 million, based on the value of a dollar in 2017, will need to grow to $3 million in 25 years to provide the same purchasing power.
Thus $3 million becomes the goal for how much money you will really need to retire comfortably.

Step 4: Reach Your Goal Using a Retirement Calculator

Now that you know how much money you will need to retire — $3 million — the next step is to figure out how to reach the goal. Using a retirement calculator, I've calculated the numbers that will get you to the goal of $3 million, based on the following assumptions:

  • Percent to contribute: 18%
  • Annual salary: $80,000
  • Annual salary increase: 2%
  • Current age: 40
  • Age of retirement: 65
  • Current 401(k) balance: $130,000
  • The annual rate of return: 9%
  • Employer match: 50%
  • Employer match ends: 7%

Based on these assumptions, you can reach a portfolio size of $2.9 by the time you reach age 65 by contributing 18% of your annual income to your employer's 401(k) plan. You can also use personal finance software like CountAbout, which lets you compare your monthly spending to potential passive income streams to determine if you have enough in your investment account to retire. 

Once you establish a goal for your retirement portfolio size, getting there is mostly a math problem. Work up your number using circumstances and assumptions that are unique to your own situation. Just make sure that you do establish a retirement goal. That way, you know exactly where you're heading and what you have to do to get there. And be sure that you give yourself wiggle room since much of retirement planning is based on assumptions.

What's Next?

Once you know the answer to the question of how much you need for retirement, you can head down one of two possible paths.

Either you're on track toward a decent retirement and can take it easy. Or — and unfortunately, this is the more common — you need to work on your retirement planning. I'm going to assume you still have a few years before retirement, which is good. But now you know you still have time to start investing for your retirement.

You can do things like increasing your savings, decreasing your expected expenses in retirement, or possibly delaying retirement by a few years.

Knowing how much you need will at least help you sleep better at night.

Larry Ludwig

Larry Ludwig was the founder and editor in chief of Investor Junkie. He graduated from Clemson University with a bachelor of science in computers and a minor in business. Back in the ’90s, I helped create some of the first financial websites for firms like Chase, T. Rowe Price, and ING Bank, and later went on to work for Nomura Securities. He’s had a passion for investing since he was 20 years old and has owned multiple businesses for over 20 years. He currently resides in Long Island, New York, with his wife and three children.

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2 Comments

  1. I have read a lot of these projections and they never seem to deal with your expected social security benefit. I will reach full retirement age next month and with my benefit and my wife’s benefit, we will get about $4000 a month. It that is the case, I only think I need about another $20,000 a year to be comfortable in retirement as I have not mortgage, no car payment and no debt. Unless you think social security is going to disappear, I think I am fine where I am. I only have a little over $750,000 in investments and retirement account but I am not worried. Should I be?

  2. This is a very general outline of expenses. Unless you sell your home and get rid of your car, you still have insurance, property taxes and maintenance costs. These costs can be substantial.
    If you have any assets, you should carry an umbrella policy to protect them. On the west coast you also need earthquake insurance and possibly flood insurance.
    It is best to face the music and draw out a detailed budget and pad it a bit to get a really good idea of estimated costs.
    Then take your plan and meet with your Financial Advisor if you have one. If not some employer 401k plans or Credit Unions do offer some services in this area.

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