How Much Money Do You Need to Retire?

Worrying about how much money you need to retire is a common, understandable, and important dilemma when planning for life after work. As much as a simple universal answer would be helpful, there isn’t one.

A recent study from financial service company Northwestern Mutual found that typical American workers believe they need $1.46 million in savings to retire comfortably. That’s up from $1.27 million in 2023 and $951,000 in 2020 — a 15% and 53% increase, respectively.

Yet while public perception of this “magic number” keeps climbing, the reality is it’s different for everyone. The figure depends on several highly individualized factors, such as your lifestyle, location, vision for retirement, and the age at which you wish to stop working.

Several rules of thumb can help you find an answer, and this article discusses key variables to consider when doing your calculations.

Common Retirement Savings Guidelines

Although giving an exact estimate of how much money you need for retirement isn’t possible, guidelines from financial experts can provide useful savings goals. Here are a few of the most widely used:

10 Times Your Income

A rough but common rule of thumb is to save at least ten times your pre-retirement annual salary. For example, someone retiring at 67 who earns $100,000 per year would need to set aside $1 million. If they heed advice from other financial experts who suggest saving 10 to 12 times their income, they’d need between $1 and $1.2 million.

The biggest benefit of this guideline is its simplicity. While it relies on knowing or estimating your retirement-age earnings — something younger individuals won’t know — it’s a quick and straightforward way to calculate how much money you might need.

Aim for $1 Million

Having $1 million in the bank is a neat and auspicious savings goal. While it won’t stretch as far as it has historically, you may still get a good few decades out of that savings. It’s worth noting inflation and the rising cost of living will cause those numbers to decrease as time goes by, but more on that later.

Age-Dependent Multiples

Another guideline involves saving multiples of your salary in relation to your age. The typical recommendation for a 30-year-old is to set aside the equivalent of their annual income. By age 40, 50, and 60, the goal is to save three, six, and eight times your salary, respectively. Finally, at 67, your nest egg should be worth ten times what you earn.

This is a useful yardstick to refer to throughout your working life because it allows you to gauge whether you’re on track financially. You can then alter course by spending less, saving more, or seeking a pay raise.

Percentages of Pre-Retirement Income

Other financial experts suggest saving enough to withdraw 65% to 80% of your pre-retirement income each year. That means a worker making $100,000 should aim to have at least $65,000 to $80,000 per annum throughout retirement. Assuming it lasts 25 years, that amounts to a nest egg worth $1.625 million to $2 million.

The 4% Rule

This rule states retirees should withdraw around 4% of their savings each year to stretch it out over 30 years. You can then work backward to determine how much you need to retire.

For example, somebody expecting $80,000 in year one of retirement would require a nest egg worth $2 million — $80,000 being 4% of $2 million. A simple way to calculate this is to choose your ideal annual retirement income and divide it by 0.04.

Calculating Retirement Savings Requirements

One way to get a concrete answer to the question, “How much money do you need to retire?” is to consider your annual post-retirement living costs and income. Multiplying the difference by the length of your retirement will show roughly how much you should save. Of course, everyone’s expenses will differ; common examples include food, healthcare, housing, hobbies, and travel.

Begin by estimating how much you’ll spend overall each year. Next, add up any income you’ll receive, such as Social Security benefits, investment returns, and pension payments. Subtracting that income from your living costs will reveal the yearly funding gap you’ll have to cover.

Finally, multiply it by how long you plan to be retired to discover how big your nest egg ought to be. For instance, Joe Smith is planning a 25-year retirement for which he expects to spend $60,000 and receive $20,000 in Social Security benefits annually. That’s a $40,000 deficit, meaning he’ll need at least $1 million to fund the entire retirement. Depending on Joe’s current salary and savings, he may realize this isn’t feasible. He can then start setting aside and/or earning more now or plan for a thriftier life after work.

As an aside, when doing this exercise, it’s important to be realistic, overestimate living costs, and account for inflation. This should prevent any nasty surprises when you do eventually retire.

You may also want to consider consulting with a qualified financial professional who can assist with assessing your financial situation. To hire an advisor suitable for your circumstances, ask friends for referrals and read financial advisor reviews online before setting up introductory calls with at least three to decide who you should hire.

Factors That Impact the Amount You’ll Need

Several factors enter the equation when calculating your financial needs in retirement. Taking them into account is essential if you want to set a realistic savings goal. Here are the main ones to keep in mind.

Location

Remember how $1 million funds a 22-year retirement in Mississippi but only 18.9 years on average? It’s a prime example of your location’s role in determining your financial needs after retirement.

Suppose you live somewhere like Hawaii, which, according to Visual Capitalist, has the highest cost of living in the country. In that case, you’ll need a much larger nest egg to retire comfortably than someone in a cheaper location.

Tax rates, housing, healthcare, and utility costs all contribute to a destination’s affordability. Settling in places where these are low will reduce how much money you need to retire.

Lifestyle

Research by web-based wealth management platform Fidelity suggests an “active lifestyle” in retirement costs at least 6% more than a less active one, which can amount to tens of thousands of extra dollars.

Think about your post-work plans. Maybe you wish to travel, join social clubs, take up new hobbies, eat in nice restaurants, and live in sought-after locations, like by the beach or in a big city. If so, you’ll need a much more substantial nest egg than a retiree content with gardening and spending time with family.

Retirement Age

The age you wish to retire is another major factor when determining how much money you’ll need. An earlier retirement lasts longer, necessitating a bigger budget to cover the extra years not working. Furthermore, if you retire before the full retirement age, your Social Security benefits will be lower if you accept them at that point. Deciding when you want to retire also reveals how much time you have left to save.

Inflation and Cost of Living

Inflation and the rising cost of living mean the amount you need to retire will increase over time. It’s crucial to account for this — especially when you’re still many years from retirement.

For example, imagine picking a generic savings goal of $1 million and planning to retire in 2040. You keep this magic number in mind over the next 16 years and eventually hit your target. According to SmartAsset’s inflation calculator, assuming an average inflation rate of 2.5%, $1 million today will be worth around $1.48 million by 2040. In other words, you end up with much less buying power than anticipated.

How Much Money Do You Need To Retire? Try an Online Retirement Calculator

In addition to speaking to a professional, a simple way to factor inflation into your budget is to use an online retirement planning calculator like this one from Citizens Bank.

These tools offer a quick way to see if you’re on track to save enough. By providing certain inputs, such as your current income, savings, age, and age at retirement, it works out how much you’ll have when you retire and what will remain at the end of it, alongside a verdict on whether you need to save more.

Another benefit of using these calculators and net worth trackers is the ability to explore different scenarios. You can easily see how changes to things like your income and savings rate would impact the outcome.

Start Saving for Retirement Today

Answering the question, “How much money do you need to retire?” is complex. It varies from person to person and depends on everything from your current circumstances to your plans for life after work.

Using the guidelines, principles, and tools above can provide useful benchmarks. By keeping them in mind, starting your savings journey as soon as possible, and regularly reviewing your financial goals, you should be able to develop a plan that delivers a comfortable retirement.

This article originally appeared on Hello Sensible.