How Much Money Do I Need to Retire?

Any long-term project is easier to tackle when you have a clear goal in mind. When it comes to planning for retirement, having a specified target amount of money to aim for helps you keep your eye on the prize…especially if you’re able to work backwards from it to arrive at the steps you need to take every year, every month, every paycheck, to ensure that you’ll hit your goal.

But how do you arrive at that figure to begin with?

A magic number with a cushion

Simply put, there are no universals when it comes to setting retirement targets. It would be easy to find someone exactly your age, who’s been working just as long and at a similar income level, whose retirement needs are far greater or far less than yours. Much of that will come down to personal preferences about how you envision your post-work life. One person might view retirement as their time to finally live large, imagining multiple international trips each year, a home in Florida and another up north, a pair of luxury vehicles in the driveway. Another might see it as a time to scale way down now that life can finally be simple again. Maybe they want to move in with their adult kids and help raise their grandchildren, or spend their retirement years in a tiny house with a small garden. Obviously, such choices will have an enormous impact on how much money each of these two people will need to have saved.

Besides your lifestyle choices, many other variables will be beyond your control. For example, by the time you’re ready to retire, housing and food could end up costing much more than you would have imagined. Returns on stocks could be abnormally low. And you might live 10 or 15 years longer than you ever expected, meaning that your savings will need to be stretched over a longer period of time. Under different scenarios where these factors vary widely, your “magic number,” as it were, could be much higher or lower.

If you’re just a few years away from retirement, you likely have a good read both on the variables you control and those you don’t. It’s not hard to imagine how you’d like to live, or how much a loaf of bread will cost, three years into the future. But if retirement is still 30 years away, it’s probably difficult to envision how you’ll want to live, and just as hard to guess what the stock market and inflation will be doing that far into the future. And bear in mind that your preferences regarding your retirement lifestyle are subject to change…not just leading up to retirement but well into it. You might get tired of traveling after a year…or you might get restless in your tiny house after a few months. That’s why it’s good to build a cushion around your estimated “magic number.”

The best method

No one has a crystal ball that can tell you with certainty exactly how much money you’ll need. But unquestionably, the very best way to arrive at a dollar amount that’s most likely to suit your needs is by working with an experienced retirement planner. These professionals focus all day, every day, on making sure their clients have saved up enough for the kind of retirement they dream of. They know not only what assumptions to make but what questions to ask you in order to put together a realistic picture of your post-retirement financial needs. It’s especially helpful to establish a long-term relationship with a planner, so that as you get closer to retirement, you can keep amending that picture based on new developments. For example, how does an unexpected inheritance affect your magic number? What about your unanticipated remarriage after an unexpected divorce? What about your changing priorities regarding the perfect retirement lifestyle? Checking in at least annually with your planner not only allows you to revise your magic number, but also gives you the opportunity to see what kind of progress you’re making in reaching it. “Do I have enough money to retire now? Will I have enough money to retire in five years? Ten?”

Rules of thumb

Not everyone has the time or money to create a detailed needs assessment with the help of a financial advisor. Various experts have therefore devised different rules of thumb to help people get a very general sense of how much money they’ll need to retire.

For example, T.RowePrice estimates that the average person looking to retire at age 65 needs assets in the amount of 7.5 to 13.5 times their annual gross income. You can generally get there by saving 15% or more of your income annually. T.Rowe also offers the following benchmarks to check your progress.

T.Rowe Price Benchmarks

By age…                                                                                          ..You should have saved…

Fidelity takes a slightly different view:

Fidelity Benchmarks

By age…                                                                                          ..You should have saved…

Those figures are based on several assumptions. For example, T.RowePrice’s benchmarks assume 5% annual income growth, 7% return on investments, and a retirement age of 65. Fidelity assumes 1.5% constant real wage growth and a 15% savings rate. Obviously, reality could differ from any of those assumptions, throwing off the accuracy of the benchmarks. That’s why they’re to be viewed as rough guidelines, not gospel.

Calculators

Another way to get a sense of how much money you’ll need to retire is to play around with some of the many free retirement savings calculators that are available online such as the ones from AARP, Bankrate, and SmartAsset. Often, people use these calculators to see if they’ve been saving enough, but most will also give you a benchmark “magic number” to aim for.  Some get more granular than others in terms of the input they ask you for. Play around with a few of them, changing the variables to see how different plans and preferences will affect the amount of money you’ll need to have saved.