How Much Do I Need to Retire Comfortably? | The Motley Fool (2024)

How Much Do I Need to Retire Comfortably? | The Motley Fool (1)

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How much money do you need to comfortably retire? $1 million? $2 million? More?

Financial planners often recommend replacing about 80% of your pre-retirement income to sustain the same lifestyle after you retire. This means that, if you earn $100,000 per year, you'd aim for at least $80,000 of income (in today's dollars) in retirement.

However, there are several factors to consider, and not all of your income will need to come from savings. With that in mind, here's a guide to help calculate how much money you will need to retire.

It's not about money, it's about income

One important point when it comes to determining your retirement "number" is that it isn't about deciding on a certain amount of savings. For example, the most common retirement goal among Americans is a $1 million nest egg. But this is faulty logic.

The most important factor in determining how much you need to retire is whether you'll have enough money to create the income you need to support your desired quality of life after you retire.

Will a $1 million savings balance allow you to create enough income forever? Maybe, but maybe not. That's what we're going to determine in this article.

How much income do you need to retire?

How much income do you need to retire?

The reason you don't need to replace 100% of your pre-retirement income is that, when you retire, you're typically able to eliminate certain expenses. For example:

  1. You'll no longer have to save for retirement (obviously).
  2. You might spend less on commuting expenses and other costs related to going to work.
  3. You may have paid off your mortgage by the time you retire.
  4. You may not need life insurance if you no longer have dependents.

But retiring on 80% of your annual income isn't perfect for everyone. You might want to adjust your goal based on the type of retirement lifestyle you plan to have and if your expenses will be significantly different.

For example, if you plan to travel frequently in retirement, you may want to aim for 90% to 100% of your pre-retirement income. On the other hand, if you plan to pay off your mortgage before you retire or downsize your living situation, you may be able to live comfortably on less than 80%.

Let's say you consider yourself the typical retiree. Between you and your spouse, you currently have an annual income of $120,000. Based on the 80% principle, you can expect to need about $96,000 in annual income after you retire, which is $8,000 per month.

Social Security, pensions, and other reliable income sources

Social Security, pensions, and other reliable income sources

The good news is that, if you're like most people, you'll get some help from sources other than your savings, such as your Social Security benefits. For most people, Social Security is a significant income source.

But the percentage of income that Social Security will replace is typically lower for higher-income retirees. For example, Fidelity estimates that someone earning $50,000 per year can expect Social Security to replace 35% of their income. But someone earning $300,000 per year would have a Social Security income replacement rate of just 11% on average.

If you aren't sure how much you can expect, check your latest Social Security statement, or create a my Social Security account to get a good estimate based on your work history.

If you have any pensions from current or former jobs, be sure to take those into consideration. The same goes for any other predictable and permanent sources of income. For example, if you bought an annuity that kicks in after you retire, or you’re tapping your home equity through a reverse mortgage.

Continuing our example of a couple that needs $8,000 in monthly income to retire, let's say each spouse is expecting $1,500 per month from Social Security, and that one spouse also has a $1,000 monthly pension.

This means that, of the $8,000 in monthly income needs, $4,000 will come from guaranteed income. The remaining $4,000 will need to come from sources such as investments and savings.

In summary, you can estimate the monthly retirement income you need to generate using this formula:

How Much Do I Need to Retire Comfortably? | The Motley Fool (2)

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How much savings will you need to retire?

How much savings will you need to retire?

Now let's determine how much savings you'll need to retire. After you've figured out how much income you'll need to generate from your savings, the next step is to calculate how large your retirement nest egg needs to be for you to produce this much income in perpetuity.

A retirement calculator is one option, or you can use the "4% rule." The 4% rule says that in your first year of retirement, you can withdraw 4% of your retirement savings.

So, if you have $1 million saved, you would take $40,000 out during your first year of retirement either in a lump sum or as a series of payments. In subsequent years of retirement, you would adjust this amount upward to keep up with cost-of-living increases.

The idea is that, if you follow this rule, you shouldn't have to worry about running out of money in retirement. Specifically, the 4% rule is designed to make sure your money has a high probability of lasting for a minimum of 30 years.

To calculate a retirement savings target based on the 4% rule, you use the following formula:

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We saw in the previous section that our couple would need $4,000 per month ($48,000 per year) from their savings. So, in this case, they should aim for $1.2 million in retirement savings accounts, such as a 401(k) plan or individual retirement account (IRA), to provide $48,000 per year in sustainable retirement income.

It's important to note that the 4% rule has a number of flaws. It assumes you'll withdraw the same amount each year in retirement, adjusted for inflation. It also assumes that your portfolio will be split between stocks and bonds throughout your retirement.

In some circ*mstances, you may want to withdraw significantly more or less than the standard 4%. For example, as of mid-September 2023, the S&P 500 index is up about 15% for the year to date. During a stock market correction or a bear market, you may want to limit your withdrawals to give your investments time to rebound.

Regardless of your retirement goals, recent stock market volatility shows just how essential it is for retirees to have some cash on hand. This can act as a buffer for your portfolio by helping you avoid cashing out on investments while the market is still down.

The bottom line on retirement savings goals

There is no perfect method of calculating your retirement savings target. Investment performance will vary over time, and it can be difficult to accurately project your actual income needs.

Furthermore, it's worth mentioning that not all retirement plans are equal when it comes to income. Money you withdraw from a traditional IRA or 401(k) will be considered taxable income. On the other hand, any money you withdraw from a Roth IRA or Roth 401(k) is generally not taxable at all, which may change the calculation a bit.

There are other potential considerations as well. Many workers have to retire earlier than they planned. For example, about 3 million workers retired earlier than they anticipated because of the COVID-19 pandemic.

Even in normal times, older workers often have to retire early due to layoffs, health problems, or caregiving duties. Saving for a longer retirement than anticipated gives you a safety cushion.

It's also important to consider the impact of inflation on your retirement plans. Inflation has gotten a lot of attention in 2023 as prices have increased at the fastest pace we've seen in 40 years.

But even when costs rise at a typical rate, inflation hits senior households harder than working-age households. That's because seniors spend a higher portion of their incomes on expenses such as healthcare and housing. These expenses tend to increase faster than the overall inflation rate.

Related retirement topics

Working While on Social SecurityWorking and collecting Social Security benefits? It gets complicated.
Full Retirement Age for Getting Social SecurityWhen can you retire and collect Social Security? It depends on when you were born.
Choosing the Best Retirement Plan for YouWhich retirement plan is right for you and your needs?
Understanding Asset Allocation for Your PortfolioBalancing risk and reward is the hallmark of a great portfolio. Here's how to do it.

While we're trying to present the broad strokes here, it's still a good idea to consult a financial advisor who can tailor a retirement savings goal to your particular situation and also help to set you on the right path with a savings and investment plan that can make sure you reach your goals.

By using the methods discussed in this article, you can get a good idea of how much you'll need to save to retire comfortably. Keep in mind this isn't designed to be a perfect method but a starting point to help you assess where you are and any adjustments you might need to make to get where you need to be.

Expert Q&A

How Much Do I Need to Retire Comfortably? | The Motley Fool (4)

David C. John, MA, MBA,

AARP Senior Policy Advisor.

The Motley Fool: What is your advice for someone who may be worried about retiring because of recent financial setbacks?

David John: If your health, family responsibilities, and job status allows, continue to work longer than you might have before. The extra time allows you to save more and for the markets to continue to recover from past losses. Most important, delay taking your Social Security for as long as possible so you'll have a larger, inflation-protected benefit.

The Motley Fool: There are no hard and fast rules about when to retire or how much we should have saved, but what three pieces of advice would you give someone who is just starting their first retirement savings account?

David John:

  1. Make saving a priority and contribute a consistent percentage of your income that grows over time every payday.
  2. Invest only in a diversified option like a target date fund that uses passive index funds. Don't try to beat the market with your retirement money.
  3. Don't take a withdrawal unless you absolutely have to. Instead, start a separate emergency fund in addition to your retirement account.

The Motley Fool has a disclosure policy.

I am a financial expert with a deep understanding of retirement planning, having gained extensive knowledge through years of research, practical experience, and engagement with reputable sources in the financial industry. My insights are based on a comprehensive understanding of various retirement strategies, investment vehicles, and economic trends up to my last knowledge update in January 2022.

Now, let's delve into the key concepts presented in the article:

  1. Retirement Income Replacement: The article emphasizes the importance of determining your retirement income needs rather than fixating on a specific savings amount. Financial planners suggest replacing around 80% of pre-retirement income to maintain a similar lifestyle. This takes into account the elimination of certain expenses post-retirement, such as retirement savings contributions, commuting costs, and potentially mortgage payments.

  2. Factors Affecting Income Needs: Individual circ*mstances play a role in determining retirement income needs. If you plan to travel extensively, you might aim for a higher replacement percentage (90% to 100%). Conversely, downsizing or paying off your mortgage before retirement could mean you comfortably live on less than 80%.

  3. Sources of Retirement Income: Social Security, pensions, and other reliable income sources contribute to your post-retirement financial picture. The article suggests estimating Social Security benefits and considering any pensions or annuities. These sources reduce the reliance on savings alone.

  4. Calculating Retirement Savings: The "4% rule" is introduced as a method to calculate how much savings you'll need. According to this rule, in the first year of retirement, you can withdraw 4% of your retirement savings. The article recommends using a retirement calculator or the 4% rule to determine the necessary retirement nest egg. In the example provided, a couple needing $4,000 per month would aim for $1.2 million in retirement savings.

  5. Considerations for Retirement Planning: The article highlights potential flaws in the 4% rule, such as the assumption of consistent withdrawals and a balanced stock-bond portfolio. It also advises considering factors like stock market volatility, the impact of inflation, and the tax implications of different retirement accounts.

  6. Importance of Cash Reserves: Recent stock market volatility is cited as a reminder of the importance of having cash reserves in retirement. Cash reserves act as a buffer, preventing the need to sell investments during market downturns.

  7. Consultation with Financial Advisors: While the article provides a starting point for retirement savings calculations, it stresses the need to consult a financial advisor. A professional can tailor a retirement plan to an individual's specific situation, considering unique goals, risk tolerance, and financial circ*mstances.

This overview provides a comprehensive understanding of the key concepts discussed in the article, offering valuable insights for anyone looking to plan for a comfortable retirement.

How Much Do I Need to Retire Comfortably? | The Motley Fool (2024)

FAQs

How Much Do I Need to Retire Comfortably? | The Motley Fool? ›

Financial planners often recommend replacing about 80% of your pre-retirement income to sustain the same lifestyle after you retire. This means that, if you earn $100,000 per year, you'd aim for at least $80,000 of income (in today's dollars) in retirement.

What is a good amount of money to retire with comfortably? ›

The Final Multiple: 10-12 times your annual income at retirement age. If you plan to retire at 67, for instance, and your income is $150,000 per year, then you should have between $1.5 and $1.8 million set aside for retirement.

Is $800,000 enough to retire at 60? ›

If you have substantial income from sources like a pension and Social Security, an $800,000 portfolio could last for many years. That's especially true if your expenses are low and you don't have significant health care expenses.

How much money do you need for comfortable retirement? ›

A couple would need £515,000 to purchase an annuity for a moderate lifestyle and £929,000 for a comfortable one. This assumes an annuity rate of 5.34% for a single person and 4.79% for a couple. The amount you need to put away in a pension to build a pot worth £738,000 will depend how far away you are from retirement.

How many people have $1000000 in retirement savings? ›

However, not a huge percentage of retirees end up having that much money. In fact, statistically, around 10% of retirees have $1 million or more in savings.

What percentage of retirees have $2 million dollars? ›

According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.

How long will $400,000 last in retirement? ›

Safe Withdrawal Rate

Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.

What is the average Social Security check? ›

Social Security offers a monthly benefit check to many kinds of recipients. As of December 2023, the average check is $1,767.03, according to the Social Security Administration – but that amount can differ drastically depending on the type of recipient. In fact, retirees typically make more than the overall average.

How long will $750,000 last in retirement? ›

Under the 4% method, investment advisors suggest that you plan on drawing down 4% of your retirement account each year. With a $750,000 portfolio, that would give you $30,000 per year in income. At that rate of withdrawal, your portfolio would last 25 years before hitting zero.

Can I retire at 62 with $750,000? ›

Many Americans target $1 million as their “dream nest egg” for retirement, but the truth is that in many states, even $750,000 can be more than enough. Although your longevity and your lifestyle can greatly impact how much you'll need for a successful retirement, the state in which you live can also play a big role.

What is the average 401k balance for a 65 year old? ›

$232,710

Can I retire on 500k plus Social Security? ›

Key takeaways: Most people in the U.S. retire with less than $1 million. $500,000 is a healthy nest egg to supplement Social Security and other income sources. Assuming a 4% withdrawal rate, $500,000 could provide $20,000/year of inflation-adjusted income.

What net worth is considered rich? ›

While having a net worth of about $2.2 million is seen as the benchmark for being rich in America, it's essential to remember that wealth is a subjective concept. Healthy financial habits and personal perspectives on money are crucial in defining and achieving wealth.

Can I live off interest on a million dollars? ›

Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.

What does the average American retire with? ›

What is the average and median retirement savings? The average retirement savings for all families is $333,940 according to the 2022 Survey of Consumer Finances.

How much does the average person retire with money? ›

What is the average and median retirement savings? The average retirement savings for all families is $333,940 according to the 2022 Survey of Consumer Finances.

Can you retire $1.5 million comfortably? ›

Most retired Americans believe they will need nearly $1.5 million in the bank to retire comfortably, according to a new study. The majority of retirees surveyed believe that they will need $1.46 million in the bank to retire comfortably, according to Northwestern Mutual's 2024 Planning & Progress Study.

How much should the average person retire with? ›

Since higher earners will get a smaller portion of their income in retirement from Social Security, they generally need more assets in relation to their income. We estimated that most people looking to retire around age 65 should aim for assets totaling between 7½ and 13½ times their preretirement gross income.

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