Determining how much money you need to save for retirement can seem daunting, especially when experts throw out numbers like $1 million, $1.5 million, or even $2 million. And with the current state of the economy, figuring out how and when to retire during a recession adds another layer of complexity.
A good rule of thumb when planning for retirement is to save enough so you can live off 75% of your pre-retirement income. Other experts recommend saving roughly 10x your income by the time you retire at 67. (Here’s how much you should have saved for retirement at each age to keep you on track with this method.)
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How Much Money Do You Need to Retire Comfortably?
How much you should save for retirement each year is a common but loaded question.
The reality? Everyone’s scenario is different. Calculating how much money you should be saving now and how much you’ll need in retirement depends on things like home ownership, medical conditions, how lavishly you plan to live, and—though it’s grim to consider—how long you expect to live.
You can work with a financial advisor to land on a number that makes sense for you, or you can use one of these three general guidelines for figuring out how much money you’ll need in retirement:
By Annual Expenses During Retirement (The 4% Rule)
When calculating how much money you’ll need in retirement, you’re really asking two things: How much money will I spend each year, and how many years will I need to spend the money?
One popular strategy is called the 4% rule, and it’s pretty straightforward: In your first year of retirement, you’ll withdraw 4% of your portfolio’s value. For instance, if you have $2 million in your portfolio, you’d withdraw $80,000.
In subsequent years, you’ll withdraw the same amount, adjusted for inflation. If prices are up 5%, you’ll withdraw $84,000 (that’s 1.05 x $80K).
This method, developed by financial advisor William Bengen in 1994, assumes your retirement nest egg is evenly distributed between stocks and bonds, 50/50. If done correctly, your retirement earnings should last you 30 years, though he recently suggested raising the target rate to 5% to account for increased life expectancies and inflation.
While helpful, this method has flaws. Your expenses in retirement could go up, meaning you need to draw more than your monthly allowance. It also doesn’t take into account ongoing account management fees. Finally, a rigid 4% withdrawal rate may not make sense in certain market conditions.
Call in the professionals: Find a financial advisor near you to get guided retirement planning from an expert.
By Average Annual Income Post-Retirement (The 75% Rule)
Other experts recommend that you plan on needing somewhere between 70% and 80% of your pre-retirement income each year—75% on average.
So if you live off $100,000 a year before retirement, you’d need $75,000 a year once you retire (that’s 0.75 x $100K).
Why would you suddenly need less money each year once you retire? There are a few reasons:
- Once you’re in retirement, you’ll no longer need to put aside a percentage of your salary toward retirement savings.
- You may receive Social Security benefits, which will increase your monthly income.
- You’ll likely fall into a lower tax bracket during retirement.
Expenses in retirement may also be lower. For example, you’ll also scrap that daily commute to work, and you may have paid off your home by then. However, rising medical costs can counteract these newfound savings, so be sure to consider the whole picture when calculating the income you’ll need to cover expenses.
By Percentage Saved Pre-Retirement (The 15% Rule)
Determining what you’ll spend in retirement can seem impossible, especially if you’re still early in your career and have no idea what life will look like in 30 to 40 years. It’s also difficult to estimate what your pre-retirement income will be in the years just before you retire.
The 15% rule makes things a lot more straightforward. As long as you start saving for retirement early enough—in your 20s ideally—you can invest 15% of your salary in your retirement accounts. In most cases, this will get you where you need to be in retirement.
Pro tip: If an end goal of $500,000 to $1 million sounds unreachable right now, don’t forget that a significant portion of that balance comes from your funds growing over time. You don’t have to save $1 million to have $1 million in retirement.
How Long Should You Expect Your Retirement to Last?
Calculating how long your retirement should last is tough for multiple reasons: You don’t know how much money you’ll actually need each year, and you don’t know how long you’ll live in retirement.
Estimating how long you need your funds to last is a wild guess at best, especially when considering life expectancy variables, but many experts suggest building plans that last at least 30 years. The average age of retirement in the U.S. is 64 years old. If you work your budget so that your retirement savings last 30 years, you’ll have enough money to get you to 94—a safer bet by all intents and purposes.
Most Americans don’t live to 94, however. The average life expectancy in the U.S. is currently 76.4 years—12 years and some change past the average retirement age. (Average life expectancy began to decline at the start of the COVID-19 pandemic and may rebound in the coming years.) If you have a healthy lifestyle and family history of longevity, it’s possible you could need your retirement to last 30 years or more.
Budgeting for Retirement
While attempting to define how much you can safely spend during retirement, most people use the 4% rule to establish a guideline for annual spending during retirement and the 75% rule to establish a guideline for total retirement savings. Still, these rules are far from perfect, and you’ll need to adjust based on market conditions and your own financial needs. Here are a few considerations to get you started budgeting for retirement:
Age You Plan to Retire
The earlier you retire, the longer you’ll need your retirement savings to last. If you work for longer, the less you’ll need to have saved (in theory, based on life expectancy).
Let’s take a look at how the age at which you retire can affect your estimated savings requirement, using the general retirement age, life expectancy, and annual savings guidelines set above:
- How much you need to retire at 64: Aim to have 30 years’ worth of 75% of your pre-retirement income. For example, 30 x (0.75 x $100K) = $2.25 million.
- How much you need to retire at age 69: Aim to have 25 years’ worth of 75% of your pre-retirement income. For example, 25 x (0.75 x $100K) = $1.875 million.
- How much you need to retire at age 74: Aim to have 20 years’ worth of 75% of your pre-retirement income. For example, 20 x (0.75 x $100K) = $1.5 million.
Lifestyle You Want to Live
How you’ll spend your free time in retirement also dictates how much you’ll need to save. Some retirees are fine with a laid-back lifestyle, perhaps with hobbies at home, like painting and gardening. Other retirees plan to travel extensively and treat themselves for years of hard work. Those in the latter camp will likely need more money. In these instances, you might consider taking on a part-time job or “side hustle” in retirement for extra income, so you can draw less from retirement savings each month.
Social Security Benefits
Social Security benefits can supplement your retirement savings, but for most retirees, Social Security is probably not enough on its own. The average monthly payout for retired workers in 2023 is just over $1,825. These funds help alleviate some financial burden, but new data suggests that most Americans are hesitant to count on the program as a source of income at all by the time they retire.
The takeaway? Social Security might be a nice cushion, but if you’re still years away from retirement, it may be wise to exclude Social Security benefits from your considerations. If you’re closer to retirement, it’s worth calculating how much Social Security you’ll get.
How much money you need to retire depends on how much you plan to spend each year and how long you think you’ll need the money to last.
While there are helpful rules to develop goals and strategies, your unique circumstances—your pre-retirement income, your health, your expenses, and how you plan to spend your retirement—mean you’ll never fit in a one-size-fits-all model.
Creating a comprehensive retirement plan with a professional can get you a more customized roadmap to retirement.