How Much Money Do I Need to Retire?

As we all get closer and closer to age 60, we start to have visions of our nearing retirement. Though we may long for the days when we get to report to ourselves instead of a boss and to sleep in past 6 AM, a new stress begins. That stress is all about how much money is needed to retire.

Senior enjoying his retirement on the beach

It’s no wonder that this is such a stressful item to ponder. Even though the average retirement age in the United States is 62, there have been plenty of articles in the media to indicate that most Americans don’t have the money they need to retire at age 65. So what happens then? And what happens to the quality of life that you are used to? Will we have to work forever?

The answer is all in making sure that you are saving to your maximum potential and paying down your debts so that you can maintain as similar of a lifestyle as possible when you hit whatever that magical retirement age will be for you.

Can you rely on Social Security?

We all know that there is no guarantee that Social Security will continue to fund in the future. Though the next decade or so looks good, after that, it’s all a bit in the air. Even now, the average Social Security payout is only $1,461 per month, as of January 2019. Multiply that by 12 and you’re only looking at $17,532 per year. That’s a pretty scary figure when the poverty level for one in the United States is $12,490 per year. You’ll be making more than the poverty level, but not by much.

How do I figure out how much I’ll need to retire?

With your eyes set on retirement, it’s time to start doing the math to determine how much you’ll need. To calculate your retirement goal, there are three general guidelines to abide by.

  • The first approach to ascertain how much you’ll need is to calculate your annual expenses in retirement and plan to spend that amount for about 25 years.
  • Another way to estimate your need is to plan on needing 70% of your average annual income from your working years, to live on during your retirement years.
  • The final way to look at it is to use the 15% rule. This rule will only work if you could start saving for your retirement in your twenties or thirties. This means that you should save 15% of your income each year, starting at that early stage in life. However, if you try to apply this figure and start saving this later in life, you likely won’t have enough.

When considering your retirement needs, make sure that you remember that your expenses at retirement will not be the same as they were during your working years. Your spending habits will likely be less, and you will hopefully be retiring with fewer debts than what you had when you were younger. And if you are lucky, your home may be paid off which will mean one less major expense to worry about. If you decide to work, after you have hit 65, you won’t have to pay Social Security or Medicare taxes either, which means an added 7.5% that goes home to you instead of being pulled out of your paycheck.

How long should my retirement last?

With the average life expectancy (age 78.69) continuing to rise in the United States, you can expect that your retirement will need to last you somewhere between 15 to 30 years. This said, planning for a 30-year retirement will be sufficient, and on average, you will likely need a bit less (a morbid thought, but it is the reality).

Once you retire, you’ll begin collecting Social Security benefits, as long as you are age 62 or over. At age 62, your Social Security payment will be only 7% of your full entitlement should you decide to wait until age 65, or even better, age 70.

Fidelity recommends that during your first year of retirement, you withdraw no more than four or five percent of your savings. Then, each year you would continue to take that same amount along with an increase to account for inflation.

Determining how much you will need for retirement is more about making your individual goals than following an arbitrary number that is one size fits all. If you are looking to live a more lavish lifestyle during your retirement, or if you plan to travel the globe, you will want to ensure that you are putting a larger amount away each year. If you are ready to live a modest lifestyle, then you will likely be quite comfortable living off the 15% you saved each year in addition to your monthly Social Security payments.

Start preparing for your retirement now

This all said, there are a lot of variabilities. Retirement isn’t cheap. And only you can truly estimate what you will need. With the appropriate effort, starting your savings as early as possible, and saving as much as you can spare each month, you’ll be on the right track. Then, you simply need to adjust up or down based on your retirement goals.

If you haven’t started preparing for retirement yet, there is no time like the present to get started. While that might sound like a cliché, it’s indeed the truth. Every day that you save will position you closer to where you want to be once you hit retirement. And, let’s face it, you’re not getting any younger.

If you are young and just graduating from college, start saving immediately. Not only will you be preparing yourself for retirement, but you’ll get used to the concept of saving and will be able to accustom your lifestyle and spending habits accordingly. When you start saving right off the bat, you learn to not miss that extra money, and it just starts to accumulate, creating a nice nest-egg that you can tap into in years to come.

If you are older and retirement is just a decade or two away, consider meeting with a financial advisor that can get you started on a path to save during the time you have left. It’s never too late, and having something in that nest-egg will be better than nothing. Not only that, but a professional in the financial industry will be able to advise you on various programs that align to your particular situation and lifestyle needs.

While there is no time like the present, it is also never too late to start preparing financially for your retirement. Start now and benefit later.