While there may not be a more common or consequential financial question then “how much money do I need to retire?,” there isn’t a one-size-fits-all answer. One person’s retirement income needs will be different from the next, depending on their circumstances and goals. Though, it’s worth noting that a recent Schwab survey found that on average, 401(k) participants believe they’ll need $1.9 million to retire. Whether you think that amount is too much or too little, this article will break down important factors to consider when determining the size of your retirement savings. A financial advisor can also help you answer this important question and guide you in a plan for retirement.
When You Want to Retire
The age at which you plan to retire is one of the most important pieces of the puzzle to determining how much you’ll need when you get there. Not only does your retirement age dictate when you’ll need to start tapping your savings, but it will also impact just how long your money will need to last. No one can predict exactly how long they will live, but having a ballpark estimate for the length of your retirement can go a long way in helping you determine how much you’ll need to have socked away.
For example, a person who plans to retire relatively early at age 55, will presumably need more in savings than a person who plans to delay until age 72. The younger person will likely be retired for far longer than his older counterpart.
For reference, the average retirement age for men and women in the U.S. is 65 and 63, respectively. According to the Social Security Administration, a 65-year-old man can expect to live for another 19 years, while a 63-year-old woman can expect to live to age 86.
Knowing when you plan to retire and how many years of savings you’ll need are critical components of retirement planning that you must determine before starting the calculation.
How Much Income You’ll Need in Retirement
Calculating how much money you need to retire will also require estimating how much you plan to spend on a monthly or yearly basis in retirement. Will your spending habits change dramatically now that you will no longer be working? Or will your lifestyle and living expenses largely remain the same, requiring your retirement income to match that of your pre-retirement cash flow?
While everyone’s income needs will differ, experts say the average retiree will need to replace around 80% of their pre-retirement income with savings and Social Security benefits. Therefore, someone with an annual salary of $150,000 would need around $120,000 per year to maintain their lifestyle in retirement. If that same person plans to live another 25 years after retiring, they would need approximately $3 million in savings and future Social Security benefits.
Spending Habits Impact Savings
It’s also important to remember that retirees’ spending habits aren’t static. Average annual expenditures fall as people get older. According to Bureau of Labor Statistics data from 2019 to 2020, people ages 55 to 64 spend an average of $66,139 each year. That number drops to $52,928 for the 65-74 age group, while people ages 75 and over spend an average of $41,471 per year, according to the BLS.
Knowing how much you will want to spend in retirement may be easy for someone who’s already in their early 60s, but a younger worker in their 20s or 30s will likely have more trouble forecasting what their spending habits will be decades in the future. As a result, setting savings goals that are tied to one’s age can be an effective strategy, especially for younger workers who are just starting out.
Retirement Savings Recommendation
Fidelity recommends having 10-times your pre-retirement income saved by age 67. That means someone with a $150,000 salary would want to have $1.5 million saved by the time they turn 67. To reach that savings goal, Fidelity recommends aiming to have at least your annual income saved by age 30; three times your annual income saved by age 40; six times your annual income by age 50 and eight times your annual income by age 60.
|Fidelity’s Retirement Savings by Age Rule of Thumb|
|30||1x your annual income|
|40||3x your annual income|
|50||6x your annual income|
|60||8x your annual income|
|67||10x your annual income|
Diversifying Your Streams of Retirement Income
The third thing to consider when contemplating how much you’ll need to save for retirement is your streams of income. A retiree with multiple income streams, like cash-flowing rental properties and dividend-paying stocks, may need less money in savings than a retiree who will simply rely on making regular withdrawals from a 401(k) or IRA to get by.
Don’t forget to count Social Security as an income stream, although the average monthly benefit is just $1,543 in 2021, according to AARP.
Annuities are also common investment products that retirees can purchase to ensure they’ll have income in retirement beyond Social Security. In exchange for paying monthly premiums or making a lump sum payment, an insurance company will make guaranteed payments to you in the future. Annuity benefits are typically payable until your death, but some plans only allow you to receive payments for a fixed amount of time.
Retirement Savings 4% Rule
If you’re struggling to try to figure out how much to save each year, you can consider living by the 4% rule. This means dividing your desired retirement income by 4% and the total will be how large your nest egg should be if you plan to live roughly 30 years after retirement. So if you want an income of $100,000 in retirement then your nest egg would need to be $2,500,000 at the age of retirement.
You can also use a retirement calculator to determine how much money you’ll need to save. The amount you’ll need to save each year is going to depend on what that total nest egg amount ends up being and what your annual growth rate is on your retirement portfolio. The general rule is to save 6% of your income each month to contribute towards that nest egg, but you may need to save more or less depending on your current age and how many years you have left to save.
When planning for retirement, how much you’ll need to have saved will depend on your retirement age and time horizon, spending habits and streams of retirement income. Remember that your income needs in retirement will likely change as you get older, so it may be wise to anticipate higher spending levels earlier in retirement. Meanwhile, Fidelity recommends having 10 times your annual income for retirement by age 67.
Retirement Planning Tips
- Consider working with a financial advisor to create a retirement plan that meets your needs. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Still need help estimating your income needs for retirement? Check out our full retirement guide to determine what else you may need to learn and calculate during your retirement planning.
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