How Much Money Do You Need To Retire?
Dreaming about your golden years? If so, you might be wondering how much money you’ll need to retire. But, the truth is there’s no one-size-fits-all answer to this question. How much money you need to retire depends on your financial situation, time to retirement, and desired lifestyle.
Evaluate your retirement goals
Before you can even figure out how much money you need to retire, you’ll need to do a bit of soul-searching. Ask yourself what your desired retirement lifestyle is. What do you want your golden years to look like?
Will you have a mortgage payment? Do you intend to downsize? Will you want to travel and splurge on experiences? Do you have children that will still live with you?
Once you have asked yourself these questions and can envision the type of life you will lead in your retirement, you can begin to plan your expenses and thus how much money you need.
Estimate your annual retirement expenses
After determining what sort of lifestyle you want to live, you can now create a rough retirement budget. You’ll want to look at all of your projected costs, both fixed and variable. Keep things like healthcare costs in mind, too.
Assuming you have no mortgage, here’s an example of expenses to consider:
Essential Bills:
- Property taxes and home insurance
- Utilities bills (electric, gas, water, sewage, garbage service)
- Car insurance
- Internet, cell phone, and cable services
- Health insurance
Spending:
- Groceries and gas
- Restaurants and entertainment
- Clothing, household goods, and additional shopping
- Extra spending cash
Additional Savings:
- A “fun fund” for vacations, birthdays, and holiday gifts
- An emergency fund for unexpected car repairs/replacement and home maintenance.
Take inflation into account
The dollar value of your expenses today won’t be the same in 10 years, 20 years, 30 years or however long you have until retirement. This is because the value of the dollar will change. So, you’ll need to remember to adjust for inflation.
A retirement calculator or a simple inflation calculator will be your best friend in helping you more accurately estimate how much money you need based on your timeline. But when estimating the value of your account, your monthly distributions need to be figured post-inflation.
Let's say you need an estimated $5,000 a month to retire based on your current expenses. Assuming you are 35 and have 30 years until your target retirement date, you’d want to estimate the inflationary value of a dollar over 30 years.
Using the above calculator, you would need about $10,600 a month to retire in 30 years, with the same purchasing power as today.
Another suggestion is to build in a buffer and plan for miscellaneous expenses (or miscalculations), too. Try adding a percentage, like 10% or 15%, on top of your inflation-adjusted budget.
If you choose to add a 10% buffer, you’re looking at a projected future $11,600 a month to retire.
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Get startedConsider your retirement income sources
Your main source of retirement is most likely going to come from your employer-sponsored 401(k) plan or your own IRA (Individual Retirement Account). But, it's a fact that the distributions from your IRA or 401(k) may not be your only income source.
Make sure to consider other income sources you’ll receive in retirement like:
- Social Security - Social Security is a government program that taxpayers fund during their working days. You, as a taxpayer, get to then draw a portion of social security (under the current program) in your golden years. How much you draw is a calculation created based on the number of years you’ve worked and other factors. Social security does not typically replace retirement income, but instead, supplements it.
- Additional payments - You may also have additional income sources in retirement. This includes things like profits from any rental properties, pensions, royalties, or business income.
Calculate how much is needed to retire
The moment you’ve been waiting for — the calculation. To recap our previous example: if you project needing $5,000 today to cover monthly expenses, you will need $11,600 a month to retire in 30 years.
According to data from Social Security, the average person currently draws $22,500 a year in SSI (or almost $1900 a month.) Social Security frequently applies annual COLAs (or Cost of Living Adjustments). So let’s assume you will draw an even $3,000 in 30 years, for simplicity of calculation.
You then need $8,600 a month from your retirement, after social security, assuming no other retirement sources. The 4% Safe Withdrawal Rule is a standard assumption that suggests you can safely withdraw 4% of your portfolio in the first year. You then continue to withdraw 4% thereafter (adjusted for inflation) over 30 years.
Take your monthly budget, and multiply it by the number of months in a year.
$8,600 x 12 = $103,200 needed in a year.
This amount should also be 4% of your total target retirement amount.
You then multiply your annual spending by 25. 25 representing 1/25, or 4%, of your total investment balance.
$103,200 x 25 = $2,580,000 total needed to retire.
Other tips to prepare for retirement:
- Save your raises and bonuses
- Frequently increase your contribution percentages
- Take advantage of the employer match on your 401(k) plan (if offered).
- Max out your tax-advantaged accounts. The 2024 max for IRAs is 7,000 (if you’re under 59½) and $23,000 for 401(k)s.
- Consider simplifying and combining your accounts with PensionBee.
Combine your retirement accounts with PensionBee
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When you leave your old job, you leave your 401(k) behind too. So, don’t settle for traditional 401(k) complexity. There is a newer, simpler way to manage your retirement with PensionBee.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.
