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How Much Do I Need to Retire?

Saving for retirement is about the type of lifestyle you will want at that time. Do you want to travel? Are you planning a move? The savings that work for some may not be the right fit for others. Here’s a simple way to estimate how much you need.


How much you need to retire depends on 2 things: When you want to retire and how richly you want to live in retirement.Investing for your future is a theme that’s been beaten into your head so much at this point that you may not even think about it anymore.

You have a 401(k), a Roth IRA and even a small brokerage account you play around with. You make monthly contributions on a regular basis and when extra money comes in, you set some aside for those investment accounts. You feel great. Accomplished.

Right up to the moment when someone asks you if you’re on track for retirement.

Uh-oh. How can you tell? Have you taken the time to really figure out how much you need to retire?

If you don’t know what you want retirement to look like, how can you know if you’re saving the right amount?

On the flip side, it is possible you’re investing too much. It may sound like a high-quality problem, but it could be preventing you from doing things now like buying that house you and your spouse have been thinking about or starting a family together with a “plus one.”

1. What does retirement mean to you?

Retirement means different things to different people. To some it may mean continuing to live like you are now — just not working. To others it may mean a lot of traveling. Or it may mean downsizing and living near children or grandchildren.

You should ask yourself if you’ve ever really sat down and imagined being retired. Your fantasy lifestyle may not so far-fetched.

If you’ve read about retirement planning before, you may have read that you should plan to need 80 percent of your pre-retirement income. Where do they get that number? Who knows! The fact is, how much income you need in retirement depends on the lifestyle you choose, not how much you’re earning before you retire.

If your retirement plans involve a smaller house and part-time work to stay active, you probably need a lot less than 80 percent. If, however, you dream of an opulent retirement with lots of travel, you might need even more money than you’re currently earning. The moral of the story? Creating a rough map of your ideal retirement — and the related financial needs — is important!

2. How much money will you need for that?

Figuring out how much you need to be saving — at least a rough estimate — isn’t as hard as you might think.

The average retirement lasts about 20 years. If we use a conservative average annual rate of return (in retirement) of 5 percent, you would need to save $300,000 to earn $2,000 a month in retirement.

Fig. 1. 20-year retirement withdrawals of $2,000 per month (no inflation).

An example of retirement withdrawals (no inflation)

One thing you’ll need to prepare for is how inflation will affect those savings over time. Since the government began tracking inflation data in 1913, we’ve seen an average rate of about 3.3 percent. In other words, $1,000 will be worth about half that in 20 years. It’s a good idea to figure out how inflation will eat away at those returns to get a more accurate picture of what you need to be putting away every month now.

Figure 2. 20-year retirement withdrawals of $2,000 a month (with 3.3 percent annual inflation). 

Retirement withdrawals example (with inflation).

The other big concern in retirement will be taxes. No one can say for sure what the tax code will look like in 20 or 30 years. We can hope for the best, but prudence says plan for the worst.

Don’t make the mistake of planning to make $2,000 a month off of your investment portfolio without taking income and capital gains taxes into consideration. Remember that Roth IRA’s have the benefit of providing tax-free income in retirement, so you can withdraw money from a Roth without worrying about tax liability.

A retirement calculator like this one can help you play with scenarios and get an idea of what you’ll need to save. There’s even a tab where you can apply factors like taxes and inflation to get a better picture of your goals. You may find out you’re right on track, or you may find that you need to make adjustments like scaling back your retirement plans, or investing more money per month.

What about you? Have you thought about how much you’ll need to retire? Are you on track? Why or why not?

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About Daniel Cross

Daniel Cross has been in the industry as an investment writer and financial advisor since 2005. He holds the Chartered Financial Consultant designation (ChFC) as well as Series 7 and Series 66 licenses, and has embarked on the arduous journey of obtaining the coveted CFA designation. Daniel lives in Florida with his wife, daughter, and pet Tortoise ironically named Turbo.

Comments

  1. Determining the type of retirement lifestyle you want to have is an excellent approach to saving for the future. If you have the notion to travel endlessly and save with those intentions, you will put away and nice nest egg. The great part to that, if you decide, for whatever reason, not to travel, that’s just more money you will have stored away. Excellent tips for planning retirement funds.

  2. I “retired” at 44, 6 years ago. Had a nice lump sum from the sale of a house and business and moved to a “cheaper” country, Turkey. I can easily manage on $2,000 a month and that includes occasional trips abroad. I think the key is to become debt free as soon as possible.

    I wrote I “retired” but I’m actually working more than I ever used to doing various projects online! But that’s more to do with the fact that you absolutely must have a reason for getting up in the morning. Nothing worse than boredom :-)

  3. Joseph Blowisf says:

    Assume 5% return on investment without putting your retirement at risk? Where do you get that kind of safe return in this 0% interest on savings environment.

    • Daniel Cross says:

      Safe is used as a relative term here. A fully diversified portfolio will have investments in multiple asset classes with the goal of keeping risk low, but not at the cost of sacrificing returns. A combination of bond funds, stock funds, and cash holdings should net 5% annually without exposing the portfolio to unnecessary risks.