If you’re in your 50s or 60s, undoubtedly you’ve asked yourself this question at least once: “how much money do I need to retire?“. Maybe retirement is right around the corner, or maybe you’re looking years or decades out into the future. Either way, this question has crossed most peoples’ minds at some point in their life.
It’s not an easy question to answer. Is $500k enough? Do you need $1 million? $2 million? There’s no one-size-fits-all solution. There’s no magical number that grants everyone with the retirement of their dreams. How much money you need to retire is going to come down to your personal situation.
That being said, here are 4 steps to help you figure out how much money you need to retire.
How Much Money Do You Need to Retire?
Step 1 - Get Organized
Step one is simple: map out your high level objectives.
For Baby Boomers and younger generations, today’s retirement is not like your parents’ or grandparents’ retirement. It’s not uncommon, in fact, for today’s “retirees” to not even be fully retired. Whether it’s cutting down hours at their current employer, picking up a part-time job, starting a new business, or simply volunteering their time – retirees today are on the go.
How Much Do You Need to Retire?
Step 2 - Take Inventory (Assets & Income)
The next step to figure out how much to save for retirement is to take inventory of how much you currently have saved, and what your fixed, stable income sources will be when you eventually retire (don’t include portfolio income like dividends, interest, or capital gains yet). This includes things like:
- Current 401k, IRA, and investment account balances
- Social Security benefits
- Part-time work
- Rental properties
Basically just count up all the money you’ll have coming in. Social Security is the main source of fixed, stable income for many of today’s retirees. A lot of older generations could rely on company pensions to get them through their golden years, but that is no longer the case: less than 30% of households have or will have a pension in retirement, according to a 2018 study by the Federal Reserve of St. Louis.
Use this free retirement calculator!
How Much Should I Save for Retirement?
Step 3 - Subtract Your Expenses
After you add up your income sources, the next step is to take a stab at what your expenses will look like in retirement. Things like your mortgage, car loans, basic living expenses, insurance, taxes, utilities, etc. etc. In a perfect world, you’d be debt-free entering retirement but that is not always possible.
Many people think their expenses will be drastically different (lower) in retirement than when they were working. This is not always the case! While you won’t be spending as much on transportation and new work clothes, you might start splurging in other areas like entertainment and fine dining. Unless you are certain, it is safer to assume your expenses will be about the same as they are today. If expenses up being smaller, consider it icing on the cake!
You should also add in a budget for “big picture” retirement goals, like major purchases (cars/boats/motorcycles), travel, hobbies, and health care. For example, if your average monthly expenses are $4,000 and you’d like to take a big family vacation worth $5,000 every year, you would want to budget for $53,000 in annual expenses…i.e. $48,000 for basic living ($4,000 x 12), plus $5,000 for travel.
How Much Should You Save to Retire?
Step 4 - Calculate the Difference
The last step to figure out how much money you should have saved for retirement is to subtract your total retirement income from your total retirement expenses. If your expenses will be more than your income, you’re going to have to make up the difference somewhere. If you’re not willing or unable to reduce your expenses, then the difference will have to come from your retirement nest egg – investment accounts such as 401ks, IRAs, etc. These accounts can produce income through dividends, interest, or capital gains.
Input your answers from Steps 1-3 in the simple retirement calculator on this page. It will give you an approximate answer on how much money you need to have saved for retirement, and how much you need to start saving each month to get there!
The Bottom Line
So how much money do you need to save for retirement? The answer will generally be different for everyone. The first step is to look at the big picture – figure out what you want retirement to look like in the first place! From there you can back-in to the income and savings you need to make it a realistic possibility.
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