There isn’t a single number you need to retire that will work for everyone. As mentioned, every person’s situation is unique and comes with its own complications and assumptions for what retirement might mean.
Fidelity’s research shows that if a 30-year retirement is planned and annual spending is expected to be 4% to 5% of savings, adjusting for inflation, there is about a 90% chance of not running out of money.
The exact percentage of the retirement calculator formula can depend on the age of retirement and life expectancy. That number changes if a person retires at age 60 and plans a 35-year retirement — about 4.3% could be withdrawn per year to retain that 90% likelihood of financial security.
To break it down, $1 million in savings is a fair number to get through the retirement years.
That said, there are a few rules of thumb you can consider.
The 80% Rule
One basic guideline is known as the 80% rule, which says you should aim to replace 80% of your pre-retirement income.
This is only meant as a guideline, but it has been called into question by some experts as being too high. As the thinking goes, your expenses decline in retirement, largely because you’re no longer saving for retirement, nor are you commuting.
Others have said workers should aim to replace 100% of their pre-retirement income, owing to inflation.
The 4% Rule
Another popular rule of thumb is “the 4% rule“, which talks about how much money you’ll need to retire. The 4% rule says that you can take your projected annual retirement expenses and divide by 4% (0.04) to know how much money you’ll need before you can safely retire.
If you project annual expenses of $50,000, you’ll need $1,250,000 (which is $50,000 divided by 0.04). Then each year you could withdraw 4% (indexed for inflation), which would come mostly if not completely from the appreciation of the portfolio.
Since the 4% rule was introduced in 1994, other advisors have said that it is not conservative enough and have suggested 3.33% or 3.5% might be more appropriate.
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Retirement Savings Targets by Age
If you’re just starting out in life, you might think that with retirement decades away that you don’t have to worry about it. But the sooner you start saving for retirement, the better off you’ll be. Here are a few rough targets for how much you should have saved at certain ages:
Target Savings by age:
- 30: 1x your salary
- 40: 2x your salary
- 50: 3x your salary
- 60: 4x your salary
- 67: 10x your salary
These should only be considered as very rough guidelines — for more detailed retirement targets, consider working with a financial advisor.
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Factors to Consider When Calculating How Much You’ll Need
When considering how much you’ll need to retire, here are a few things that you will want to keep in mind:
Current Income
Some financial planners suggest that you base your retirement projections on your pre-retirement income. You might use 75% or 80% of your current income as a basis for estimating how much money you’ll need as retirement.
For a more detailed look, go through your budget and see how each type of expense will change in retirement. You may need more or less income than you think.
Retirement Lifestyle Goals
Another thing to think about is how your lifestyle overall might change in retirement. Consider whether you plan to move or make other big lifestyle changes that can impact both expenses and taxes. While some costs may go down (such as if you pay off the mortgage on your home), others might go up as you change your lifestyle.
As one example, if you want to explore the world or visit grandchildren, your travel budget may drastically increase from pre-retirement levels.
Social Security
Social Security is a government program intended to help with income in retirement. The Social Security Administration can provide an estimate of what your benefit might be — check ssa.gov — but keep in mind that the amount of your monthly check depends on your lifetime earnings history, and how old you are when you start claiming Social Security.
Although you can start taking Social Security at age 62, you would get a reduced amount. For every year you wait, you get about 8% more. If you wait until age 70 before starting your Social Security benefits, you’ll get the maximum amount.
Social Security can be complicated, but it’s one of the few steady income streams workers can count on, so be sure to understand how Social Security works.
Healthcare
Healthcare can be a major cost in retirement, especially if you retire early. At age 65, you will qualify for Medicare, but if you retire before then, you’ll need to make sure that you have a plan for covering healthcare costs in retirement. Even after qualifying for Medicare, you may still have significant health-related costs, depending on your specific medical situation.
(Learn more at Home Affordability Calculator)
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Start Saving for Retirement as Early as Possible
While retirement may seem like forever away, the truth is that it will be here before you know it. The earlier you start saving for retirement, the easier it will be for you. This is primarily due to the magic of compound growth. The longer your money is working for you, the more time the earnings have to compound and grow.
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Ways to Invest for Retirement
You have many different ways that you can invest and save for retirement. Many employers have 401(k) accounts that give tax advantages for saving for retirement. On top of that, some employers offer matching funds when you contribute to a 401(k) account.
Another option can be an Individual Retirement Account (IRA), which you can set up on your own. There are two main types: a traditional IRA and a Roth IRA.
While both types let you contribute up to $6,500 yearly (as of 2023), with an additional catch-up contribution of $1,000 for those over age 50, one key difference is the way the two accounts are taxed: Traditional IRAs let you deduct your contributions up front and pay taxes on distributions when you retire, whereas Roth IRA contributions are not tax deductible, but you can withdraw money tax-free in retirement.
(Learn more at How Long Will My Retirement Savings Last?)
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Closing the Gap Between Current Savings and Your Goal
If you realize that you have a gap between your current savings and where you think you need to be when you retire, it’s important to make a plan to address the gap. If you choose to do nothing, the gap will only grow wider.
You have three main ways to close the gap — either start saving more of your money or find a way to increase the returns your investments are earning. You can also consider making different choices about the sort of retirement you want.
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The Takeaway
It would be nice if there was a simple way to calculate the exact amount you need to retire on. Instead, think of your retirement amount as an ongoing series of calculations that you’ll refine as you get older, and as your thinking gets clearer.
There are some things you can predict, but many that you can’t — including the state of your health (or your spouse’s), the turns the market might take, or a change in priorities. All you can do is start early and save steadily for the retirement you hope to have one day.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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